A $586 billion stimulus plan for China's economy
China seeks stimulation
Nov 10th 2008 | BEIJING, From Economist.com
A stimulus plan to inject $586 billion into China's economy. But the devil lies in the detail
WITH one eye turned towards keeping its own economy on track and the other trained fearfully on the impact of the global economic downturn, China has announced a four trillion yuan ($586 billion) stimulus package, the largest in the country’s history.
Unveiled by China's State Council on the evening of Sunday November 9th, the two-year spending initiative will inject funds into ten sectors, including health care, education, low-income housing, environmental protection, schemes to promote technological innovation, and transport and other infrastructure projects. The government also says that some of the spending will be directed to reconstruction efforts in areas battered by natural disasters, such as Sichuan province which was devastated by a massive earthquake in May.
“Over the past two months, the global financial crisis has been intensifying daily,” the State Council said in a statement. “In expanding investment, we must be fast and heavy-handed.” News of the stimulus package has been welcomed by global investors. Asian and European stockmarkets rose on Monday, with American markets also climbing. China's decisive move is likely to please foreign governments which are now grappling with the global downturn. It comes a few days before the Chinese president is scheduled to attend a global economic summit in Washington, DC, and a day after Hu Jintao had spoken by phone to the American president-elect, Barack Obama, about the global economic crisis and other issues.
China’s government has so far provided few details of when the money will be spent or how it will be divided. Officials do say that fourth quarter investment for this year will total 400 billion yuan, including 20 billion yuan brought forward from next year's central government budget. If fully realised, the two-year spending spree would amount to about 16% of China's annual gross domestic product.
The newly announced measures also include a loosening of credit policies and tax cuts. The plan calls for reforms in the country’s value-added tax regime that would save industry 120 billion yuan, according to an estimate by the government. Credit ceilings for commercial banks are to be abolished in the hope of channelling more capital to small enterprises, rural areas and unspecified “priority projects”.
The government is concerned about the potential for frivolous or speculative investments, so the State Council also decreed at its meeting on Sunday that credit expansion must be “rational” and should “target spheres that would promote and consolidate the expansion of consumer credit.” Finding ways to get Chinese consumers spending should be a priority. Unleashing domestic demand has been a longstanding goal of Chinese policymakers, but Chinese consumers—with few of their health-care or retirement needs reliably met either by employers or the state—often prefer to save.
China has sustained double-digit economic growth rates over the past five years but the economy has been slowing, considerably in some sectors. The economy logged a growth rate of 11.9% last year, but many forecasters believe that it will dip below 10% this year, with fourth-quarter growth down to 6% or even lower.
Growth rates in that range may be the envy of recession-battered economies, but mark signs of trouble for China. It is an article of faith among many economists—and a view publicly stated earlier this year by the Chinese prime minister, Wen Jiabao—that China needs a growth rate of at least 7% to avoid massive unemployment. The country has been hurt in recent months by softening export markets, depressed domestic property values and stockmarkets, and declining consumer and investor confidence.
Much remains unclear about the implementation of the stimulus plan—even its size. According to Sherman Chan, a Sydney-based economist with Moody's, the real size of the package may not be as large as the government has described. “Some of the measures announced in the stimulus package appear to have been already introduced or even implemented earlier. Hence, the size of this stimulus package—which is expected to be in the form of additional spending—may have been overstated,” Chan wrote in a research note.
Nov 10th 2008 | BEIJING, From Economist.com
A stimulus plan to inject $586 billion into China's economy. But the devil lies in the detail
WITH one eye turned towards keeping its own economy on track and the other trained fearfully on the impact of the global economic downturn, China has announced a four trillion yuan ($586 billion) stimulus package, the largest in the country’s history.
Unveiled by China's State Council on the evening of Sunday November 9th, the two-year spending initiative will inject funds into ten sectors, including health care, education, low-income housing, environmental protection, schemes to promote technological innovation, and transport and other infrastructure projects. The government also says that some of the spending will be directed to reconstruction efforts in areas battered by natural disasters, such as Sichuan province which was devastated by a massive earthquake in May.
“Over the past two months, the global financial crisis has been intensifying daily,” the State Council said in a statement. “In expanding investment, we must be fast and heavy-handed.” News of the stimulus package has been welcomed by global investors. Asian and European stockmarkets rose on Monday, with American markets also climbing. China's decisive move is likely to please foreign governments which are now grappling with the global downturn. It comes a few days before the Chinese president is scheduled to attend a global economic summit in Washington, DC, and a day after Hu Jintao had spoken by phone to the American president-elect, Barack Obama, about the global economic crisis and other issues.
China’s government has so far provided few details of when the money will be spent or how it will be divided. Officials do say that fourth quarter investment for this year will total 400 billion yuan, including 20 billion yuan brought forward from next year's central government budget. If fully realised, the two-year spending spree would amount to about 16% of China's annual gross domestic product.
The newly announced measures also include a loosening of credit policies and tax cuts. The plan calls for reforms in the country’s value-added tax regime that would save industry 120 billion yuan, according to an estimate by the government. Credit ceilings for commercial banks are to be abolished in the hope of channelling more capital to small enterprises, rural areas and unspecified “priority projects”.
The government is concerned about the potential for frivolous or speculative investments, so the State Council also decreed at its meeting on Sunday that credit expansion must be “rational” and should “target spheres that would promote and consolidate the expansion of consumer credit.” Finding ways to get Chinese consumers spending should be a priority. Unleashing domestic demand has been a longstanding goal of Chinese policymakers, but Chinese consumers—with few of their health-care or retirement needs reliably met either by employers or the state—often prefer to save.
China has sustained double-digit economic growth rates over the past five years but the economy has been slowing, considerably in some sectors. The economy logged a growth rate of 11.9% last year, but many forecasters believe that it will dip below 10% this year, with fourth-quarter growth down to 6% or even lower.
Growth rates in that range may be the envy of recession-battered economies, but mark signs of trouble for China. It is an article of faith among many economists—and a view publicly stated earlier this year by the Chinese prime minister, Wen Jiabao—that China needs a growth rate of at least 7% to avoid massive unemployment. The country has been hurt in recent months by softening export markets, depressed domestic property values and stockmarkets, and declining consumer and investor confidence.
Much remains unclear about the implementation of the stimulus plan—even its size. According to Sherman Chan, a Sydney-based economist with Moody's, the real size of the package may not be as large as the government has described. “Some of the measures announced in the stimulus package appear to have been already introduced or even implemented earlier. Hence, the size of this stimulus package—which is expected to be in the form of additional spending—may have been overstated,” Chan wrote in a research note.