Sample Research: China’s Efforts In Creating An Economic Stimulus

China’s growth has fallen significantly with the figures indicating the economy may be at its lowest growth since 1992. The second-largest economy looks to be bracing itself for tough times ahead as it looks amid a trade war with the United States, which no one seems to be winning. The country's gross domestic product (GDP) in the last three months grew by 6%, a further decline from 6.2%, which was recorded in the previous quarter. Statistics released by the government have confirmed that the deterioration has missed the projected growth of 6.1% that had been forecasted by a poll analysis by Refinitiv. With experts agreeing that the Chinese economy is likely to experience slower growth further, consumers have braced themselves for the projected hard economic times ahead by significantly cutting on heir spendings. This study discusses the declining china’s aggregate demand and how the Chinese government’s proposals could provide a fiscal stimulus to its economy. The government in China has proposed and adopted fiscal policies as an answer to the ailing economy, but the effects the policies will have on the economy at large are by far not sustainable.

Discussion

The US-China trade war has been of no benefit to any country, which is the main reason the two major economies in the world decided to hold talks to ease the economic tension between them. Some of the results of the talks are agreements that the US will reduce some of the tariffs it had imposed on Chinese goods while China, on the other hand, will carry on with its commitment to purchase US products in addition to opening up its domestic markets. Although this trade deal may provide a short term lifeline moving forward, the more critical problem is the declining economic growth in China over the last couple of quarters, which economists project may further deteriorate to 2020 and beyond. According to statistics released by the government, the third-quarter growth has recorded the slowest growth of 6% down from 6.2%. This growth has been termed as the slowest ever since the first quarter of 1992 (Wen and Wu, 2019). Earlier projections had projected a decline, but the current figure has fallen beyond the projections.

The current projections on the growth rate projects that the growth could further decline to 5.8% in the last quarter of 2019 (Wen and Wu, 2019). Despite November, having experienced a strong report with retail sales up7.8%, economic experts are still pessimistic that these are not looking any good for the Chinese economy. Bracing itself for hard economic times, the Chinese government is making proposals on adopting policies that will promote expenditure, raise foreign companies’ access to its markets, and reduce billions of dollars in taxes. In response to these economic trends, the consumers in China have changed spending habits. Despite the government proposing policies that will boost more consumer spendings, there is scepticism on the direction the Chinese economy is headed, and thus consumers are opting to save rather than spend the money. Consumer spending can change aggregate demand. Increased consumer spending will have a longer-lasting overall effect on the economy. The government is aware of this, and that explains its proposal for the adoption of fiscal policies. 

Applying both fiscal policies and monetary policies can be very crucial in influencing the total demand for goods and services in a country. The chines government is proposing fiscal policies of making changes in government spending and the model and level of taxation in order to create a real aggregate demand. The fiscal policies suggested by the Chinese government can address and boost the aggregate demand in a short period (Hu, 2018). However, the effects of this policy cannot be sustained over a long time. The changes in taxation and government spending should not be the case for application with the current state of the Chinese economy. These policies could have worked better during the 2008 economic recession for their ability to address short term problems such as unemployment shocks (Wu, 2018).

China’s finance minister Liu Kun has suggested that the government will promote the fiscal policy to enhance the country’s economic stability and growth. He has acknowledged the fact that the country's supply system has not fully adapted to changes in the demand structure, and therefore the Chinese economy is yet to achieve a virtuous cycle. One of the components of the fiscal policies the country intends to adopt and support is tax reduction. Tax and fee reductions reduce the burden on enterprises while stimulating SMEs (Cheng, 2019). Also, the reduction of taxes will promote industrial transformation and innovation.

The economy will have more money to lend, and the households and firms will borrow the money and re-invest it back into the economy, see fig. 4.6. The result will be bringing stability to critical areas such as finances, employment, foreign trade, local and international investment, and the country's financial expectations, among others. The country has set its focus on reducing the VAT, corporate tax, and social security contributions. Micro-enterprises which records a monthly sale of less than 100,000 yuan are exempted from value-added tax (Wen and Wu, 2019). To boost spending among the consumers, the government further proposes to implement six deduction policies for individual income tax, which relates to children's education. Furthermore, continuing education is also targeted, and this leaves the figure of the citizens who are exempted from paying personal income standing at 91.6 million. By improving fiscal arrangements and favourable monetary policies, the economy can play a vital role in ensuring that significant risks are prevented, poverty is eliminated, and the quality of the ecological environment has been improved.

Taxation plays an essential role in determining how the economy grows in china. After the 2008 economic recession, china experienced a rapid recovery, mainly owing to its aggressive government stimulus program (Hu, 2018). The plan in the proposed tax reduction is to increase consumer expenditure. Rather than the Chinese government making capital spending, the capital is distributed evenly to the citizens through tax reductions and being exempted from paying taxes. This will create increased consumer expenditure, thus creating capital infusions into the economy (Bordo and Levy, 2019). The multiplier effect will be based on the amount of increase in final income that will have arisen as a result of increased spending of the consumers. If the outcome of the taxation favours the projections of the government, then the application of taxation may increase consumer spending and investment, leading to widespread positive effects on the economy of China.

Although the policy may assist individuals and companies, the reduction of taxes has dramatically affected local governments and municipalities who have been debt-ridden all over the nation. The policy exempts individuals and companies from paying a total of over 2 trillion yuan, which is equivalent to US$298 billion (Cheng, 2019). Local governments will thus have to put up with tight budgets in conformity with the country's taxation arrangement. Only the government reviews its tax-sharing agreement between the local government and the central government. The majority of regional governments have cut down their revenue growth targets following these plans by the government to adopt tax reduction policies. The total estimate for growth goes down to 4% from 6.5%, which had been recorded during the previous year (Wen and Wu, 2019). On the other hand, adopting a closed economy may be the cure the Chinese government needs for this situation. A closed economy will integrate both fiscal policies and monetary policies.

Fiscal policies create money to be spent by firms and households while monetary policies increase investment and savings, see fig.6.1. More investment means more chances of revenue collection for regional governments.

The theory of aggregate demand, which is the total expenditure in an economy, has its implications on output and inflation. Economists who believe in this theory believe that aggregate demand is affected and influenced by several economic decisions that may be governmental or private (Arestis, 2018). Governmental policies are mostly monetary and fiscal. The more prominently revolve around expenditure and taxation. According to Keynesian policies, fiscal policies are more effective than monetary policies, although both policies affect aggregate demand. 

As illustrated in fig. 6.2 changes in aggregate demand, whether the economy was anticipating or was not anticipating them, will tend to have a significant temporary effect on real output and employment in an economy. Monetary policies and increased expenditure boost, therefore, has the potential to produce real shifts in the economic output if the amount of capital infused remains constant. Expansionary monetary policies attract consumers to spend more instead of saving (Bordo and Levy, 2019). The government on applying expansionary monetary policies leads to the creation of incentives for local banks to lend out as well as money for businesses to borrow.

As applied in fig. 4.7 and fig 4.2, a significant component of aggregate demand is expenditure by the government and local governments. The aggregate demand is not only stimulated by more government spending, but it is also influenced by increasing or decreasing tax rates.

Conclusion

The government in China has proposed and adopted fiscal policies as an answer to the ailing economy, but the effects the policies will have on the economy at large are by far not sustainable. Reduction in taxation and other attempts to boost spending have a short-term effect on the economy. Besides bringing to an end of the current trade war between the United States and China, the Chinese governments need to find a long-lasting answer to the declining growth of the economy. The answer mostly lies in the change of policy on individual and government spending.

 References

Arestis, P. (2018). A Coherent Approach to Macroeconomic Theory and Economic Policies. Alternative Approaches in Macroeconomics (pp. 127-154). Palgrave Macmillan, Cham.

Bordo, M., and Levy, M. (2019). Tariffs and Monetary Policy: A Toxic Mix. Shadow Open Market Committee, 27.

Cheng, C.Y. (2019). China's Economic Development: Growth and Structural Change. Routledge.

Hu, L., Han, J., and Zhang, Q., (2018). The impact of monetary and fiscal policy shocks on stock markets: Evidence from China. Emerging Markets Finance and Trade, 54(8), pp.1856-1871.

Wen, Y. and Wu, J. (2019). Withstanding the Great Recession Like China. The Manchester School, 87(2), pp.138-182.

Wu, J. (2018). China’s macroeconomy: main challenges and countermeasures. Journal of Chinese Economic and Business Studies, 16(1), pp.117-123.