Six suggestions for China's embattled economy

How should the Chinese government overcome the current obstacles in the macro economy in order to achieve equilibrium between structural adjustment and economic growth? I have listed six suggestions, which I have ordered according to prominence.

First, the Chinese government should implement more proactive fiscal policies. Judging from the results of the new round of directed loosening policies, such as the directed cut to benchmark interest and interest rates, refinancing and Pledged Supplementary Lending (PSL), the central bank has no other choice but to repeatedly resort to aggregate monetary policies to adjust the economic structure. However, fiscal policies have not been among the series of measures. To strictly control fiscal deficits to remain within 3 percent of the gross domestic product (GDP), the central government has rigidly adopted fiscal policies to balance the economy.

Moderately expansive fiscal revenues can alleviate the pressure on the central bank and push forward economic restructuring as long as such revenues are not unwisely spent by local government officials or industries splurging on surplus product. The government should consider interest subsidies and tax rebates for SMEs. In addition, fiscal revenue, if appropriately used, can be channeled to public services including education, healthcare and nursing facilities for the elderly.

Second, the central bank should not be too confident in the directed loosening monetary policies. It would be better to implement aggregate loosening monetary policies by lowering interest rates and the benchmark interest rate gradually. The central bank has been implementing open market operations and directed loosening monetary policies to increase fluidity in the market since the global financial crisis in 2008. However, the policies have not yet taken effect. The continued drop in the macro economic data in August further dented confidence in the market.

Third, the China Banking Regulatory Commission should cooperate with the central bank. If we do need to cut the financing costs of SMEs, we need hybrid policies composed of aggregate loosening monetary policies and differentiated supervisory policies from the CBRC.

Fourth, the Chinese government should accelerate economic structural reform. It doesn't matter whether GDP growth hovers at 7 percent, 7.5 percent or 6.5 percent, as long as the quality of the GDP is improving and benefiting the country's residents. Structural reform should be implemented by increasing the proportion of residents' income in the GDP, breaking the monopoly of the state-owned enterprises in the service sector, and building the market system for factor prices.

Fifth, China needs to decrease the frailty of the financial market before fully opening the capital account. In the coming years, the Chinese financial market will need to embrace increasing fluctuations in the market. To prevent a financial crisis triggered by fluctuations in short-term capital, the Chinese government should seize the current opportunity to enhance market awareness by increasing the capital adequacy ratio, permitting the bankruptcies of some lenders who cannot return loans and allowing a certain part of the shadow banking industry to breach.

Sixth, we need to prepare a series of countermeasures to combat a possible economic and financial crisis, since China cannot always be lucky enough to avoid financial crises. A quick reaction to crises, such as those seen in Finland and South Korea in the past years, will alleviate negative impacts more quickly. Otherwise, the crises may linger, slowing development for years or even decades.

The writer is the director of the International Investment Office of the World Political and Economic Research Center of the Chinese Academy of Social Sciences.

The article was translated by Wu Jin. Its original version was published in Chinese.