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Criticism of hefty savings by govt agencies doesn’t take local needs into account

2015-11-20

By Wang Yanhang Source:Global Times Published: 2015-11-19

 

A recent research report by securities firm China International Capital Corporation has claimed that China`s economic slowdown is partly due to excessive government savings.


The report, titled Continued Increases of Government Savings Drag Down Economic Growth, claimed that by the end of September this year, savings by government agencies and organizations had reached 21 trillion yuan ($3.3 billion), leaving a lot of funds idle, resulting in capital inefficiency and a waste of resources. This argument has drawn widespread attention.


I believe that for an issue of such significance, it is imprudent to jump to such a simple conclusion without thorough research into how the money is being used by the government agencies, because different levels of government vary in their financial capabilities and financial management.


Specific items of government savings should be clearly identified. Even though some areas like the housing fund require huge amounts of money, the funds involved belong to the people, so government savings in these areas should be handled carefully.


For those savings that are intended for the smooth running of government agencies, the amounts of income and expenditure are strictly regulated and can`t be misappropriated for other uses.


Furthermore, the functions of China`s government agencies are different from those in other countries, as one example can show. The Chinese government is highly attentive to its domestic and external debts, so it would not allow a situation to occur like the crisis in Detroit, US. The city found itself facing a financial crisis after spending more than it received in income, and had no plan to fix its financial problems.


Apart from the issue discussed above, some suggestions might be quite helpful.


It is true that the risks from government debt are growing in China, and savings by government agencies are spiraling. Increasing government debt over the years has shown that the debt burden remains a challenge for public finances. After extensive field research, I believe that around 20 percent of local governments are in urgent need of tacking capital inefficiencies and the issue of waste of resources.


Local governments should establish a standard financing mechanism in order to lower financing costs and allow investment to play its key role as a growth driver. They should also create new forms of financing, attract more private capital, and improve capital efficiency.


There is certainly room for China to realize faster and more balanced growth. If the government wants to accomplish this goal through investment, new development ideas must be established in an effort to address the issues that slow down the economy.


Under China`s new normal, when the economy is characterized by slower growth, optimization of structure and shift in incentives, most people find it difficult to take a long-term view about investment.


Instead, they focus on short-term profits, which results in short-sighted, crude, and inefficient investment, with some local governments particularly guilty of this. It takes time to correct investment errors, and rational investment decisions come from clear investment ideas.


The author is a senior fellow of the Chongyang Institute for Financial Studies at Renmin University of China.

Key Words: China   economy   growth  

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