China's multi-billion dollar riddle
By Olivia Chung
HONG KONG - China, faulted over its apparent unwillingness to join other
leading economies in bailing out the international finance system, came out at
the weekend with an economic rocket that may deflect some overseas critics,
even though the 4 trillion yuan (US$586 billion) package is aimed primarily at
boosting the domestic economy.
The stimulus, announced by the State Council on Sunday and aimed at running
through to 2010, continues a reversal of the government's previous tightening
of monetary policy announced at the beginning of this year. It follows three
interest rate cuts in the past two months and adoption of fiscal policy
intended to offset
the impact of the global crisis.
Premier Wen Jiabao on Monday urged local governments not to "waste a single
minute" in implementing the stimulus plan, according to Xinhua News Agency.
"In expanding investment, we must be fast, effective and forceful," Wen was
reported as saying at an executive meeting attended by provincial leaders and
Cabinet ministers. "We must focus on priorities and adopt a down-to-earth
attitude to implement the measures."
The country's top goal is to achieve "steady and relatively fast" economic
growth and prevent "economic ups and downs" amid global and domestic economic
challenges, Wen was quoted as saying.
The stimulus package was crucial to tide over current difficulties and
maintaining long-term growth momentum, he said. It was also meant to help
bolster global growth by boosting Chinese investment and consumer spending.
The stimulus may help suck in imports, ranging from commodities to value-added
products required to strengthen China's infrastructure and raise the country's
own value-added output.
The Chinese package was "a note of optimism especially for the global economy",
said Bruce McCain, chief investment strategist at Key Private Bank in
Cleveland, according to a Bloomberg report. "We're all hopeful that it will
help US stocks as well, especially raw materials.''
China has set the pace for expansionary policies elsewhere, said Tim Condon,
ING Asia regional economist. "Countries that supply capital equipment look like
they will be the frontline beneficiaries of this package," he said, according
to a Associated Press report. Faster growth in China will also be better for
its neighbors. "For every country in the region, [China] is either their top
trading partner or is on the way to becoming the top," Condon was quoted as
The 4 trillion yuan will be spent on 10 sectors, including housing, rural
infrastructure, transport and improvements in water and electricity supply.
That could boost demand for iron ore from Australia and Brazil, factory and
construction equipment from the US and Europe and industrial components from
Even so, Marc Chandler, global head of currency strategy at Brown Brothers
Harriman & Co in New York, estimated that only about a quarter of the
package, or $150 billion, represents new spending, Bloomberg reported.
That view was echoed by DBS on Tuesday. The bank's researchers said they did
not want to overstate the scale of the stimulus package at this stage because
it was unclear how much of it was in addition to government expenditure
The government's 4 trillion package for the coming two years "includes all
those individual plans announced earlier, either officially or unofficially",
Merrill Lynch economist Ting Lu said on Monday.
The central government will spend at least 100 billion yuan of the new package
in the fourth quarter and brought forward 20 billion yuan from next year's
budget for earthquake reconstruction, Xinhua said. This will bring total
investment for the fourth quarter to 400 billion yuan. Further details of the
plan are expected to be released at the Central Economic Work Conference, to be
held on November 27.
The stimulus is intended to counter declining domestic economic growth, which
fell to 9% year-on-year in the third quarter, the lowest in five years and 2.3
percentage points lower than the same period last year. The economy grew 10.6%
in the first quarter.
Economists said a growth rate of less than 7% would mean a hard landing for the
economy. Forecasts for next year were moving closer to that level, with some
warning that growth might slow to as low as 6%.
Yi Xianrong, a researcher with the Institute of Finance and Banking under the
Chinese Academy of Social Sciences, said the Chinese cabinet meeting at the
weekend officially confirmed a shift to "proactive'' fiscal and "moderately
easing'' monetary policies from the previous "prudent" fiscal and "tightening"
"The surprise package has indicated that the country's economy now faces an
increasing risk of slowing down further. This will become the top issue to be
discussed at the Central Economic Work Conference, which is also expected to
introduce more measures over next few months to improve growth, he said.
The government initially planned to spend 5.1 trillion yuan on infrastructure
projects during the 11th Five Year Plan (2006-2010), including 3.8 trillion
yuan on transportation infrastructure. That represents a 73% increase over the
preceding five-year plan period.
The government is strongly placed to inject new funds into the economy, given
its large foreign reserves and budget surplus and declining inflation.
Revenue totaled 421.7 billion yuan in September, the Ministry of Finance said
in October. Fiscal revenue increased 25.8% in the first nine months, to 4.89
trillion yuan, and expenditure rose 25.5% to 3.64 trillion yuan, giving a 1.25
trillion yuan surplus.
"With nearly US$2 trillion in foreign reserves and a budget surplus, China has
wider scope for fiscal stimulus than governments in many developing economies
that face big external deficits and high debt burdens," said Jing Ulrich,
chairman of China equities at JPMorgan. "Beijing's new policy drive of
upgrading infrastructure, rural land reforms, and expansion of social welfare
is akin to a 'New Deal' with Chinese characteristics.''
Ma Jun, chief economist of Deutsche Bank Greater China, warned before the
package announcement that "if no more active fiscal policies come out next
year, the country's economic growth may drop to 6%". In a research report, Ma
said: "The central treasury should maintain its budget deficit for 2009 at 400
billion yuan, including a 100 billion fiscal surplus this year and the 300
billion in national bonds to be issued next year."
The stimulus comes amid easing government concerns about rising prices
following a series of increased borrowing rates and curbs on bank lending,
while global commodity prices have also declined from highs earlier this year -
oil has dropped to below US$60 per barrel, its lowest level since March last
year, on the prospects of a protracted recession in the US and elsewhere.
The producer price index (PPI), the main gauge of factory-gate inflation, rose
only 6.6% in October from a year earlier, the slowest pace in eight months,
according to data released on Monday. The consumer price index (CPI) fell in
October for the sixth successive month, dropping to 4% year-on-year from 4.6%
in September, according to figures published on Tuesday. The CPI may drop below
3% by the end of this year, Merrill's Lu said.
The drop in inflation has allowed the government to take more aggressive
monetary and fiscal action to stimulate the economy without stoking consumer
prices, Ulrich said. Further measures are likely to focus on the government's
long-term goal of rebalancing economic growth and pursuing social priorities
such as rural development and affordable housing, she said.
"The government also has massive infrastructure projects planned to 2020.
Spending on priority areas such as railway and power grid expansion can now be
front-loaded to support economic growth. To cover an expected fiscal deficit in
2009, the government is likely to increase its government bond issuance by a
wide margin," she said.
DBS forecast that the present stimulus will have more impact on local, rather
than global, commodities such as cement "because their prices are dictated by
Chinese demand instead of global demand". The benefits should be less
significant to other sectors such as exports, domestic consumers, banking and
The impact on the country's exporters would be limited, with export sectors
expected to remain "lackluster" as major markets in the US and Europe "are
heading towards very slow growth or even recession in the coming quarters". A
cut in VAT "might mitigate financial pressure on enterprises'', DBS said.
Other measures the government could take to maintain growth include a cut in
benchmark interest rates.
"We expect a 108 basis point rate cuts towards year-end and another 54 basis
points next year," Merrill's Lu said. "We expect the expansionary fiscal policy
and moderate monetary policy to help China sustain GDP growth at 8% in 2009."
Even so, the growth rate that is "in accord with China's potentials should be
above 10%", according to an editorial in Ta Kung Pao, a pro-Beijing Hong Kong
newspaper, on October 28. A loss of one percentage point in GDP growth is the
equivalent to a loss to the country of about 200 billion yuan, it said.
Olivia Chung is a senior Asia Times Online reporter.