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China Urged To Unwind Fiscal Stimulus

by Mary Swire,, Hong Kong

27 July 2010

The strong economic recovery in emerging East Asia means it is time to unwind monetary and fiscal policy stimulus across the region, according to the Asian Development Bank.

The Asian Development Bank has told China to raise interest rates or face a hike in inflation. The bank is concerned that the economy may overheat due to the triple stimulus of tax cuts, increased spending and cuts in interest rates. In a report on the emerging south-east Asian economies, the bank stated that ‘...interest rates may need to rise significantly depending on how exchange rate policy is handled’.

The bank monitors the economic progress of Taiwan, South Korea and Hong Kong, as well as China, the world’s third largest economy. The bank is forecasting growth in GDP of 9.6% for China this year but, as with other south-east Asian economies, it is concerned that the stimuli introduced to combat the recession should now be reined in to allow the economy to recover more quickly. The bank is also hopeful for a strengthening of the Yuan, which will help ease inflationary pressures.

China announced a CNY4 trillion (USD585bn) fiscal stimulus package in November 2008 in response to the global financial crisis, consisting of infrastructure spending, tax cuts and subsidies. Fiscal incentives included a cut in purchase tax for small cars, which resulted in a 70.5% year-on-year boost in sales in July last year, VAT rebates on exports and tax cuts to stimulate the property market.

Speaking about the region’s economy as a whole, the Bank’s Senior Director of Regional Economic Integration, Srinivasa Madhur, said: “While most emerging East Asian economies are assured of a sharp V-shaped recovery this year, it is too early to say that the ‘V’ stands for victor”. He went on, “Ensuring the sustainability of the recovery depends heavily on the correct timing, policy mix, and pace at which economic stimulus is withdrawn. The private sector must be strong enough to take over”.

The Asian Development Bank updated its economic review of the region in July and though it is happy that China has already taken fiscal measures to pull its economy forward, it still has concerns about its ability to sustain growth and resist inflationary pressures unless further action is taken this year.

TAGS: tax | economics | fiscal policy | gross domestic product (GDP) | China | Hong Kong | currency | inflation

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