Reform targets policy mismatch

Better coordination sought between fiscal and monetary authorities

The Chinese government is working on a better coordination mechanism between fiscal and monetary authorities to pave the way for further economic reform, a senior government consultant said on Thursday.

Li Yang, deputy head of the Chinese Academy of Social Sciences, the country's top think tank, said a regular meeting between fiscal and monetary officials, which was held in the 1990s but later abandoned for more than a decade, will restart very soon.

Such officials are mainly from the Ministry of Finance and the People's Bank of China, the country's central bank.

"The mismatch between fiscal and monetary policies is certainly an aspect that the government should attach more importance to if it wants to improve the efficiency of the policies," Li said.

"Fast economic growth in the last decade could have covered up some problems, but slower growth in the future will see the contradictions loom large."

He said capital tension next year will lead to more disputes and friction between the two sectors.

"We will see a substantial increase in the fiscal deficit due to single-digit growth in fiscal revenue," Li said. "And the credit available to lend will still be very scarce, given a surge in credit demand."

Li said the roles of the two central government departments need to be defined more clearly, especially on government bond issuance and the management of the account in which tax revenue and other public funds are deposited, as well as foreign exchange reserves.

"The Ministry of Finance's control over the national treasury sometimes works as another monetary policy system, as it allocates capital to different institutions," he said

"Leaving total foreign reserves to the central bank has seen monetary policies held hostage to uncontrollable capital flows."

The central bank usually needs to inject or withdraw liquidity in the market to counteract fluctuation of foreign reserves to maintain a stable exchange rate for the national currency.

Li suggested the government divide foreign reserves into different categories, leaving only a small portion to be managed by monetary authorities.

He made the remarks in Beijing where the academy's annual report on China's financial development was released.

In the report, the think tank estimates credit supply in 2013 will increase by 16 percent from the end of this year, while M2 - a broad measure of money supply that covers all deposits and cash in circulation - is likely to increase by 15 percent.

"Judging from history, such a pace would keep a reasonable balance between the goal of shoring up the economy and curbing inflation," the report said.

During the annual Central Economic Work Conference last weekend, authorities confirmed proactive fiscal and prudent monetary policies for 2013.

Ji Zhihong, director-general of the research department at the central bank, said a 16 percent increase in new credit is too much for the economy.

"Actually, the growth in new loans might be the same as that of this year."

Peng Xingyun, a researcher at the academy's Institute of Finance and Banking, said although the monetary stance next year is expected to be somewhat looser, and with more new loans than in 2009, credit growth will be much lower than the pace of more than 30 percent at that time, meaning fewer side-effects, such as asset quality deterioration and inflation.

He forecast the inflation rate will be kept below 3 percent throughout 2013.

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