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Rural economies need treasury bond benefits
By Xin Zhiming (China Daily)
Updated: 2004-03-18 14:26

China plans to issue 110 billion yuan (US$13.3 billion) in construction treasury bonds this year.

The plan features two conspicuous changes from previous practice.

One is the reduction of scale by 30 billion yuan (US$3.6 billion) over last year. The second is that the majority of the treasury bond fund will be earmarked for rural and social development.

The country launched the pro-active fiscal policy - mainly including long-term construction treasury bond issuance - in the wake of the 1997 Asian financial crisis and surfacing domestic deflation around that time to boost demand and galvanize the economy.

The growth track of the national economy in the past five years has testified to the efficacy of that policy.

In 2001, for example, the Chinese economy registered 7.3 per cent year-on-year growth against a backdrop of widespread recession in world economies.

The treasury bond funds have also prompted the construction of a series of infrastructure projects that have helped boost local economies.

However, the policy is essentially an interim measure aimed at spurring insufficient demand. We must be cautious against possible setbacks incurred by its long-term implementation.

If the issuance of treasury bonds continues to expand, the accumulated deficit pressure will increasingly pinch on the government in the next decade.

The budgetary deficit proposed by the Ministry of Finance for this year, which was equal to that budgeted in 2003 and passed by the NPC delegates, reflects policy-makers' reservations about further expansion of the "deficit fiscal policy." This is the first time since 1998 the deficit has not increased.

The economy may develop a dependence on government investment after years of treasury bond investment drive. In theory, at least, government investment risks squeezing out private investors and weakening the market's role in allocating resources.

Another fallout of the treasury bond construction boom is shoddy projects due to lack of rational pre-construction assessment.

Last year the State Audit Office found that nine out of the 12 airports funded by treasury bonds suffer from operational deficiencies.

Now that the economy has seen flickering signs of inflation, we must readjust the scale of bond issuance even if it remains too early to call for phasing out the pro-active policy.

The reduction in scale this year signals such an adjustment.

What is more noteworthy is the shift of the use of funds to rural and social development.

Premier Wen Jiabao pledged in his report on government work that the government will "increase investment in agriculture and rural areas." The decision to increase treasury bond funded investment in the rural economy bears testimony to the leadership's determination in this regard.

Since 1998 when China began to issue construction treasury bonds, less than 30 per cent of the fund was put in the rural areas.

Among the "meagre" capital, most was for large-scale infrastructure projects which serve the long-term interests of rural people. Additional funding to bring rural people instant benefits is still lacking.

Hopefully, this year's issuance will work toward solving the problem. The funding will be invested mainly in the construction of six kinds of small projects for rural areas: water-efficient irrigation, potable water supplies, roads, methane production facilities, hydroelectric plants and pasture enclosure.

Meanwhile, the fund will be directed towards a balanced social development, serving the newly-devised concept of "balanced development."

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