China Stimulus Would Be ‘Mistake’: Nobel Laureate Phelps

Nobel laureate Edmund Phelps was among a group of economists who called on China to refrain from introducing a stimulus package as pressure grows on the government to take steps to support economic growth.

It would be a “mistake” for Premier Li Keqiang to use stimulus to maintain the expansion, Edmund Phelps, winner of the 2006 Nobel Prize in Economic Sciences, said at the Bo’ao Forum yesterday in southern China’s Hainan province.

Phelps was joined by Jia Kang, a researcher at the Ministry of Finance, and Stephen Roach, former chairman of Morgan Stanley Asia, in encouraging China to stay the course in carrying out reforms that aim to transform the economy to one led by consumption rather than state-led investment and exports.

China’s leaders may be reluctant to duplicate large-scale stimulus after a 4 trillion yuan ($645 billion) package during the global financial crisis led to inflation, a housing bubble and industrial overcapacity.

Premier Li is set to deliver the keynote speech at the Bo’ao Forum today. China last week outlined spending on railways and low-income housing and tax relief to support the economy after a slowdown endangered Li’s target of 7.5 percent growth this year. The economy expanded 7.7 percent last year, the same as in 2012. The country will report first-quarter gross domestic product data next week.

As long as China’s growth rate remains in an acceptable range, the government should never implement short-term stimulus, Jia, director of the Ministry of Finance’s fiscal-science research institute, said at the Bo’ao Forum yesterday.

The government should stick with the idea of market forces playing a greater role in the economy, Jia said.

SOE Reform

China’s leaders are struggling to maintain growth while increasing private ownership in industries traditionally dominated by state-owned enterprises, liberalizing the financial sector and loosening price controls.

Promoting reform of SOEs is essential for the long term health of the economy, said Phelps, who is currently a professor at Columbia University in New York. The government shouldn’t be tempted by short-term growth, he said.

Slower growth in China is a good thing as it means a more sustainable, service-led and greener economy, Roach said at the Bo’ao Forum.

— With assistance by Benjamin Haas, and Xiaoqing Pi

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