A few days into 2011, and one of its big themes is already obvious. While most of the world’s biggest economies are committed to monetary looseness and fiscal tightness, China is doing just the opposite. Beijing is using a full array of tools – interest-rate increases, reduced loan quotas, bespoke reserves requirements for individual banks – to counter the fastest inflation in two years. Meanwhile, it plans to continue spending big sums on public housing and other public works. In officialese, monetary policy has shifted from “proactive” to “prudent,” while fiscal policy remains “proactive”. The latter could actually be imprudent.
At this juncture, monetary tightness is clearly appropriate: between the end of 2007 and the end of last year, growth in China’s broad money stock outpaced nominal gross domestic product by 25 percentage points. Fiscal looseness is another matter. In the 30 years to 2008, Beijing’s budget balance showed a cumulative deficit of a little over Rmb3,000bn. In the past two years it has overspent by about Rmb1,800bn, and reportedly envisages another Rmb900bn shortfall this year.
