STRENGTHENIG QUANTITATIVE RESEARCH TO IMPROVE THE SCIENTIFIC DECISION-MAKING

1. STRENGTHENIG QUANTITATIVE RESEARCH TO IMPROVE THE SCIENTIFIC DECISION-MAKING Fan Jianping DG, Economic Forecasting Dept. State Information Center September 3, 2007 www.sic.gov.cn

2. Scientific Governmental Decision-Making • Proposal of scientific governmental decision-making • Necessity of scientific governmental decision-making • Methods to achieve scientific governmental decision-making www.sic.gov.cn

3. Strengthen the Research on Quantitative Analyses • Since it was founded, SIC has been engaged in the research on quantitative analyses to support the scientific governmental decision- making. • Econometric Model • Macroeconomic model • Econometric model on the analysis and assessment of macroeconomic policies • Input-Output Model • CGE Model www.sic.gov.cn

4. Research on the Fade-Out of Pro-Active Fiscal Policy • 1998-2002, China carried out pro-active fiscal policy and prudent moneytary policy, which reached outstanding effects on promoting the economic growth and aggregate demand. • The investment via issuing and using the construction treasury bonds was not helpful for the increase of self conscious social investment, but added the governmental fiscal burden. So some people suggested to reduce the issue of constructive treasury bonds. www.sic.gov.cn

5. Research on the Fade-Out of Pro-Active Fiscal Policy (Cont.) • In 2003, we simulated the impact of stopping the issue of construction treasury bonds on economy. It was found that the economy would be badly impacted if the bonds were cancelled, and the result was reported to the NDRC. • In 2005 the government promulgated the policy of the gradual fade-out of the pro-active fiscal policy. www.sic.gov.cn

6. Estimation of the Potential Growth Capacity of Chinese Economy • 1978-2003, the annual growth rate of China’s GDP reached to 9.4% on average. But it was resulted from rapid investment growth, which could not continue in long term. • The insufficiency of effective demand would be a key challenge for the economic development during the period of the 11th five-year plan. www.sic.gov.cn

7. Estimation of the Potential Growth Capacity of Chinese Economy (Cont.) • In line with the 11th five-year plan made by NDRC, we have estimated the potential growth capacity of Chinese economy with the macro-econometric model and forecasted the demand constraints and development prospect for Chinese economy, as well as put forward policy controlling objectives and focuses accordingly. www.sic.gov.cn

8. Quantitative Research on the Reform of RMB Exchange Rate Regime • Since the unification of RMB exchange rate regime in 1994, China has adopted the managed floating exchange rate system on the basis of the market supply and demand. • In recent years, the China’s double favorable balances of current account and capital account have been increasing, which has raised disequilibrium of balance of payment as a result. By the end of June 2005, China’s foreign exchange reserve had reached US$ 711 billion, which made great pressure on the appreciation of RMB exchange rate. www.sic.gov.cn

9. Quantitative Research on the Reform of RMB Exchange Rate Regime (Cont.) • We have studied the impacts on Chinese economy in case that the RMB exchange rate appreciated by 1%, 2%,3% and 5% respectively using our macro-econometric model. And the results were reported to the NDRC. • Starting from July 21, 2005, China reformed the exchange rate regime by moving into a managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies. RMB will no longer be pegged to the US dollar and the RMB exchange rate regime will be improved with greater flexibility. On that same day, the initial adjustment level of RMB exchange rate rose by 2% . www.sic.gov.cn

10. Interest Tax • In 1950 and 1980, China ever promulgated the policy of interest tax respectively, which were not put into exercise due to some reasons. • On November 1, 1999, Chinese government started to levy 20% of personal income tax on the households’ bank savings in order to expand the domestic demand. • In March 2005, some deputies of NPPCC proposed to cancel the interest tax with the same reason of stimulating the domestic demand. www.sic.gov.cn

11. Interest Tax (Cont.) • The fact of ever-increasing individual banking savings from 1999 indicates that implement of interest tax policy has not reached the initial objectives. • The promulgation of this policy lacked the research of quantitative analysis. www.sic.gov.cn

12. Income Distribution • Since 1998, the theme of macro-control has been the expansion of domestic demand each year. Nevertheless the domestic demand changes little every year. • Since 1990, the fiscal revenues have been far more rapid than the household incomes. Over the past decade, the annual increase rate of fiscal revenue is above 20% while the increase of disposable incomes of urban and rural household falls tremendously behind the former. www.sic.gov.cn

13. Income Distribution (Cont.) • The unsatisfied increase of domestic demand lies in insufficient consumption instead of investment. The households only take a tiny proportion in the distribution of social wealth, which has enhanced the imbalance between investment and consumption. www.sic.gov.cn

14. Migrant Labor Force from Rural China • As a long term heavy burden on rural development, the problem of the intensive population, less farming land and surplus labor force in rural areas has always been serious in China. • Since the policies of reform and opening up, the labor force in rural areas have been migrating on a vast scale with the implement of macro-control policies. • At present it is necessary to promulgate new reform policies as some new problems have emerged. • Reform of land system • Reform of residential registration system • Reform of social security system www.sic.gov.cn

15. Improving the Scientific Governmental Decision-Making • At present CGE model is one of the standard instruments for governmental policy analysis of different countries. • The CAGP SIC project aims at setting up the interregional CGE model of China for the purpose of policy simulations. • The model will be a new platform for SIC to offer scientific decision-making support for the government. www.sic.gov.cn

16. STRENGTHENIG QUANTITATIVE RESEARCH TO IMPROVE THE SCIENTIFIC DECISION-MAKING Thank You！ www.sic.gov.cn