China’s local governments need to have more transparent accounts to ensure the European financial crisis is not replicated on the mainland, according to economics Nobel laureate Christopher Pissarides.
The economist, who is also a professor-at-large at the Hong Kong University of Science and Technology, said Tuesday that Europe’s stagnant economic growth is the result of smaller unproductive economies of southern Europe being tied to large, highly productive economies like Germany. The euro zone plunged into a debt crisis because it did not monitor the fiscal policies of the small nations, he said.
Pissarides said a similar situation is occurring in China. The reforms of the 1990s that decentralized budgets gave local governments incentive to manipulate the local banking and state-enterprise system to their advantage.
Local government borrowings through local enterprises, local banks and trust and investment companies pose a threat to the central government but Beijing is not tackling the problem well.
“It’s dealing with the short-term problem… it’s turning a blind eye to whatever manipulation they do in the local accounts so that they don’t give as much money to the center as in theory they should be giving. But it’s not dealing with the medium to long-term problem,” Pissarides said.
The local governments ought to be facing hard budget constraints and be more responsible in their fiscal revenue and spending, he added.
“There should be more transparency about where the revenues are, state enterprises should be left alone to function as enterprises for production and not financiers of local governments’ spending,” he said.
Pissarides said that although fiscal policies in China are tight on paper, there is enough room for local governments to maneuver and deal with the strict budget constraints they face.
The economist also said that Europe’s economic growth in the coming year will be tiny and the European market for Chinese products will not grow by much.
Europe is China’s biggest trading partner and is crawling out of its financial crisis. Pissarides said that besides slow growth in bilateral trade, China will be affected by greater prudence among Europe’s financial institutions.
China’s financial institutions are also conducting many more checks and becoming more cautious about supporting risky ventures, which are crucial to business innovation, he said.
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