Nov 09
China announces aggressive stimulus plan
Written by DJ on Sunday, November 9th, 2008 at 7:07 pm
Filed under:News | Tags:economy
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Filed under:News | Tags:economy
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I have expected some major efforts by the Chinese government to encourage internal economic development and consumption in the face of the global meltdown. In particular, I thought it would be the time to spread the benefits of infrastructure and its followup development to areas beyond the coastal areas. Nevertheless, I am surprised about the scale of stimulus package announced by Beijing. $586 billion is on a par with the $700 billion financial rescue plan passed in the U.S. But in terms of relative size and impact, the Chinese plan sounds much more impressive. That $700 billion is, after all, a rescue effort with modest effect at stimulating the economy. The real stimulus plan in the U.S., is yet to be figured out and waiting for Obama.
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[Update] Here are some details of the Chinese stimulus plan, as reported in Chinese news media.
The Chinese premier Wen chaired a State Council meeting on November 5, with an agenda focused on expanding domestic consumption and smooth economic growth. The meeting concluded that a flexible yet cautious macro economic policy was needed due to the threats from the increasingly serious global financial crisis. The country will focus on ten areas of development.
- Accelerate housing development for disadvantaged populations by increasing government support for low-incoming housing, accelerating redevelopment in communities of shacks, building permanent residence for nomadic population, expanding trial programs of overhauling dangerous buildings in rural areas.
- Accelerate rural infrastructure development by increasing efforts at bio-gas, safe drinking water and rural road developments, improving rural power network, accelerating major water use projects such as the south-north water transfer project, reinforcing dangerous reservoir dams, strengthening large scale irrigation systems, and expanding poverty alleviation and development efforts.
- Accelerate major infrastructure developments such as railroad, highway and airports by focusing on a number of passenger and coal transport lines and railroads in the western China, improving the highway network, building airports in central and western China, and accelerating urban power network overhaul.
- Accelerate development of medical, cultural and educational fields by strengthening medical service at community level, speeding up rural school building overhaul in central and western China, and promoting development of special education schools in those areas.
- Enhance ecological environment development by building more urban sewage and garbage treatment facilities, speeding up control and treatment of water pollution, strengthening protection of forest resources, and supporting key energy saving and emission reduction projects.
- Accelerate innovation and structural adjustment by supporting high-tech industry development, improving manufacturing technologies, and supporting development of the service sector.
- Accelerate various reconstruction projects in the areas affected by the Sichuan earthquake.
- Increase the income of urban and rural residents by raising the minimum grain purchasing prices next year, increasing various agricultural subsidies, improving social security services for low-income groups, increasing subsidies for insurances, and continuing increase the level of basic pensions provided to retirees and subsistence allowances standards for qualifying citizens.
- Implement value-added tax reform and restructuring in all industries and in all regions to encourage technical improvement and retooling in enterprises and to reduce burdens on them by 120 Billion RMB.
- Increase financial sector support to the economic growth by lifting restrictions on loans provided by commercial banks, expanding credit by reasonable scale, strengthening loan support for major projects, agricutural work, median and small enterprises, mergers and acquisitions, and cultivate consumer consumption credit growth.
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November 9th, 2008 at 8:09 pm
Here is the newest analysis from Nouriel Roubini’s (aka. Dr.Doom) website.
November 9th, 2008 at 9:57 pm
I think the size is not the most important thing – what is crucial is how the money is spent.
Also money alone may not be the answer – further economic reform, more utility price flexibility and a move away from State-controlled enterprise is probably necessary too.
November 9th, 2008 at 10:45 pm
They have announced the upgrade of the railroad system, which is the most cost effective and green transportation. They were too crazy in building highways (could be under the influence of HK engineers returned from US study) and neglected railway.
I hope to emphasize the following:
1. QC. Thousands of factories are closed due to QC problems in food and lead paint in toys. The government regulators should come in.
2. The underground palace on the first emperor of China. Hope I can see it before I die.
November 9th, 2008 at 11:53 pm
Raj,
I don’t agree. I think China is doing something like a FDR’s New Deal thing to boost local infrastructure and other projects to boost domestic consumption. Besides, 8.5% gdp growth is nothing to laugh at, despite how low it is.
I wouldn’t believe what “Dr. Doom’s” assessment of how China’s economy be so dependent on exports to US and Europe. Many economists have said that China’s boom is unsustainable, yet they are still doing well. China’s technocrats are more adept to deal with economic issues than what he thinks.
November 10th, 2008 at 6:26 am
@Raj
A move AWAY from state controlled enterprise? maybe in some limited areas, but in general? and as a response to the crisis? why?
November 10th, 2008 at 7:28 am
I agree with Raj. Except that I DO think China’s boom is unsustainable, for many different reasons.
But true, not enough details have been given as to how are the $586B going to be spent, so for all we know, it could be all used to cut taxes to SOE. I am a bit skeptical especially concerning the chapters of environment and welfare. But who knows, the ideas of the chinese New Left seem to have a strong impact on the Hu-Wen tandem.
Hey, for once I was quicker than MF at commenting the news. Here is my last night’s article about the same subject at chinayouren: http://chinayouren.com/eng/2008/11/china-getting-fiscal/
November 10th, 2008 at 12:37 pm
@4
I don’t agree.
You mean you think China should throw the money around in an uncooridinated way?
Besides, 8.5% gdp growth is nothing to laugh at, despite how low it is.
Who says it’s definitely going to stop there?
+++
@5
A move AWAY from state controlled enterprise? maybe in some limited areas, but in general? and as a response to the crisis? why?
Who said anything about a response to the crisis? It is regarded by many as necessary for the future. Why do you get Chinese banks lending money at cut-price rates to people/businesses who can’t pay them back or don’t care because the rates are so low? Because they are owned/controlled by the CCP at one level or another and officials wanted growth, growth, growth to look good and get promoted. Of course some private banks would try to get in on the boom anyway, but they’d be less reckless given what has been happening. Whereas chances are State-controlled banks will do the same in a few years time after the recovery has started.
More generally State-owned/controlled business is seen as being a drag on the economy, much like the cost of environmental damage is.
November 10th, 2008 at 1:44 pm
Interestingly this could be at least in part a matter of smoke-and-mirrors.
http://tinyurl.com/5zacv7
The whopping half-trillion-dollar stimulus package that China unveiled over the weekend is not as big as it sounds. Taking into account expenditures that were expected to take place in any case, the amount of new spending proposed by Beijing is actually a small proportion of the headline figure. The package will not be implemented fast enough or stimulate domestic consumption enough to offset the global downturn, many analysts say.
The State Council, the equivalent of China’s cabinet, said Sunday night that the government would spend 4.0 trillion yuan ($585.5 billion), or nearly a fifth of the country’s gross domestic product, by the end of 2010. The capital will be pumped into infrastructure, housing, rural reform and environmental projects. Beijing allocated 100.0 billion yuan ($14.6 billion) for the fourth quarter for building roads, railways, airports and affordable rental housing.
“We don’t really know how large [this package] is. It does include lots of things that we already know about. It also includes a lot of things that would’ve happened regardless,” said Eric Fishwick, a Hong Kong-based economist for CLSA. The stimulus package folds in anticipated expenditures, such as 1.0 trillion yuan ($146.4 billion) for post- earthquake reconstruction in southwestern China, corporate tax breaks, export rebates to stem the decline in manufacturing and land reform measures meant to reduce the rural-urban income gap.
Only 1.5 trillion yuan ($219.6 billion) of the fiscal stimulus is truly new, with 2.5 trillion yuan ($366.2 billion) stemming from previously allocated funds, calculated Bill Belchere, Macquarie Securities’ China economist. Infrastructure spending typically cannot be accelerated quickly enough to offset a cyclical downturn, and the package is not sufficiently targeted on domestic demand to sustain China’s growth, which has slowed to single-digit percentages annually, analysts say. Heightened demand for construction materials may briefly boost commodity producers but will not offset the global slump, Belchere said.
November 10th, 2008 at 2:59 pm
China has at least get 8% growth to provide enough jobs to avoid unrest. It will be tough this year as a lot of factories manufacturing goods for export are closing. The returns except the railroad improvement, mineral extraction (from the new finds in Tibet), and some others are diminishing.
For the longer term, over 10% is not sustainable for any nation. Since China was so far behind, 10% is sustainable in the last 10 years.
November 10th, 2008 at 3:00 pm
Before we try to assess the impact of the stimulus package, it will be worthwhile to have an estimate of the current size of the Chinese economy. Let’s start with CIA World Facts:
GDP (purchasing power parity): $7.099 trillion (2007 est.)
GDP (official exchange rate): $3.251 trillion (2007 est.)
……
GDP – composition by sector:
agriculture: 11.3%
industry: 48.6%
services: 40.1% (2007 est.)
I believe that PPP still underestimated the Chinese economy, especially the service sector. I don’t have the figure to back up this assertion. Instead, lets consider a dinner for 10 in Beijing. You will go to a fairly good restaurant, you will have a suite with one or two dedicated waiter/waitress, the cost would be roughly 1000RMB. For a comparable dinner with similar service in New York City, I don’t think $500 will do it, $1000 perhaps. Therefore the RMB’s actual purchasing power vs dollar in this case is close to one to one. Therefore it is possible the Chinese GDP measured in this adjusted PPP terms is closer to $9-10 trillion … We did not even count the gigantic underground service industry in China.
The argument can be turned on its head, namely that service sector does not reflect the actual economic power of a nation, witnessing the instant vaporization of the Wall Street wealth. This view argues that the Chinese economy is not larger than the CIA’s PPP figure, but at the same time, it means that the US, EU and Japan’s economies are actually much smaller since the service sectors are 80% of these economies
November 10th, 2008 at 4:24 pm
* PPP still is a better guide and is widely used for comparison. You have one good example, but some one may have a similar one to offset yours. Dedicated servers are no big deal due to the ridiculously low salary cost. I prefer regular server service in US. Check consumer goods. For a MP3, you can buy one more expensive than in US if it is not a local brand. Same for seeing a doctor in term of cost/benefit.
* The local government are celebrating and checking how they can take their share illegally like hiring their son-in-laws. It also helps the expensive car dealers here in US to upload some screamers with the corrupt money from the sons of these local governors…
* They should enforce and punish those air/water polluters from the big industries by the central government. Local government helps the polluters. Even some of the treatments are not turned on due to it costs for the electricity and the local government always lets them know the central government is coming to check.
November 10th, 2008 at 4:44 pm
“Dedicated servers are no big deal due to the ridiculously low salary cost. … ” but that is the point, isn’t it? I would agree that the values in service industry is hard to measure, that leaves us with agriculture and manufacturing …
Talking about manufacturing, measuring pollution from the production side is obviously flawed. Ultimately it is the consumers that caused the pollution. And ultimately to curb pollution and reduce carbon output, somebody, especially those people with high consumption rate have to consume less by becoming poorer (loose their jobs or loosing purchasing power.) Perhaps this is what’s happening to the world now.
November 10th, 2008 at 4:46 pm
They should enforce and punish those air/water polluters from the big industries by the central government. Local government helps the polluters. Even some of the treatments are not turned on due to it costs for the electricity and the local government always lets them know the central government is coming to check.
Tony, I agree but this has been raised many times in the past – the government still does little or nothing to enforce the rules. Indeed the government itself is disorganised as there are numerous ministeries that have some sort of responsibility/authority in this area, but they keep stepping on each other’s toes or pass the buck so no one does anything. SEPA (or whatever it is called now) has a tiny fraction of the staff it needs – I remember reading that its US counterpart has something like 10 times or more staff despite the fact that the US population is much smaller than China’s.
In a time of slow-down I think the government will ignore calls for more environmental enforcement to try to get more growth. This is short-sighted as we all know pollution limits growth too, but Hu and Wen will probably be happy to pass the problem to their successors and try to be remembered as the leaders that stopped China crashing/suffering too much from the current crisis. Thus I think things will get worse, not better.
November 10th, 2008 at 5:17 pm
@wuming
I am not sure I follow your line of reasoning well.
By calculating China’s GDP using the PPP (or the “enhanced” PPP according to your observations), basically what you are saying is that China’s produce is worth twice (or X times) its face value. Right.
But in this case you should also take into account the same PPP calculation for the stimulus package, since it is denominated in RMB. In other words, you must apply the same exchange rate for the package as for the GDP, if you want to do a fair comparison.
So the size of the announced investment relative to Chinese economy shall remain the same, whatever calculation for PPP you come up with. Am I missing something?
November 10th, 2008 at 5:56 pm
@chinayouren
You didn’t miss anything since I have not said anything about the actual impact of the stimulus package. One possible scenario may well be what you said, that the stimulus package is actually larger than the US rescue package in value. Given the depressed commodity market, the package may indeed have significant impact on the world economy (for example, paradoxically, raising the commodity prices again)
My point is that perhaps Chinese economy should be weighted on par with US and EU economies. Its economic policies should be viewed with all the seriousness due to the country. Afterall, Chinese government of the last 20 years certainly didn’t break more promises than their counterparts in US and Europe.
November 10th, 2008 at 9:50 pm
@Raj #4,
“You mean you think China should throw the money around in an uncoordinated way?”
It is the US and not China throwing money around in an uncoordinated way. The US threw billions in stimulus checks to its citizens hoping that they will spend, but most of them just put it in the bank for a rainy day. The US threw billions in bailout to the major banks hoping that they lend out money to small businesses, but they didn’t. The US threw billions in bailout to the Auto industry hoping them to retool so that they can build more fuel efficient cars, but did they do that? No. The US threw billions in bailout to AIG and they are still hemorrhaging money. The problem is that the US hopes that throwing money at the companies will fix the problem when it is not.
The US has this whole bailout thing lopsided. It is like the US government giving out everyone fish when most people just want to learn how to fish for themselves. The US government should be paying people to educate themselves to get the high demand jobs like in healthcare. The US government should create an disincentive to buy cars by making them to use public transportation and build public projects to improve US’ infrastructure. The US government should start building schools, create demand for teachers and construction workers. Give incentives for people who want to become teachers. The government should be helping to create the jobs that they need so that the people will have confidence in the economy and will spend again.
Unfortunately, this will probably never happen because US is stuck at its status quo. Put a band aid into the problem and let someone else take care of the problem.
November 10th, 2008 at 10:46 pm
It is the US and not China throwing money around in an uncoordinated way.
That doesn’t answer my question. Should China spend its money in a carefully co-ordinated way. Yes or no.
If the answer is “yes” then you agree with me. If the answer is “no” then you should be ignored by everyone on this blog when it comes to matters of economics.
November 11th, 2008 at 6:04 pm
@Raj,
seems the private banks in the West haven’t done very well at lending prudently. Maybe that is ‘intentional’ – making 12% a year for 40 years and then being wiped out in one year with lots of collateral damage to the economy is better than making 9% a year forever to the capitalist.
To me most of banking looks like a natural role of government. Like defense or water.
In NZ we have a state owned bank (which we just set up in the last few years) – and it doesn’t look to be any worse off (probably much better) in terms of exposure than the private banks. Of course maybe China has terribly managed banks I don’t know that sort of detail but I’d suggest the best solution there would be get better management rather than sell the old management with the company.
November 12th, 2008 at 2:29 am
The “experts” seem to agree in principle that central government spending on infrastructure worldwide is a way to stimulate the global economy and reverse the downturn. And realistically, in some “western” countries at least, such spending may equate to deficit spending. That China can infuse such sums while having 8+% growth in this environment is impressive. Having said that, some “experts” also seem to suggest that any Chinese growth less than 8% per year would not accommodate the influx of workers due to urbanization that is currently ongoing.
The amount China is talking about is certainly nothing to sneeze at. But in per capita terms, that already seems less impressive, if only compared to US spending. Furthermore, her list of “priorities” sounds 1950’s-esque in many ways. Those are things that are taken for granted in the US and Canada, with the possible exception of social/affordable housing corollary to point #1, and perhaps a variation of points #9-10 for increased government regulation in the financial sector.
I think such a plan is a good thing, but once again illustrates how much further China still has to go.
November 12th, 2008 at 3:30 pm
China’s 585 B has to be higher in PPP term. So far, it does not help the world stock markets. However, it should put a bottom for some companies that will benefit from it like steel, cement, heavy equipment… US is in just a bad shape: bailout for bank, now for auto, and what’s next?
I bet China will eventually spend double that amount in the next 2 years and I hope the world recession will be over by then. China should calculate return of each investment and act accordingly. Some new airports have very low return.
November 12th, 2008 at 4:00 pm
Chinese are driving the capitalist markets and innovations like this biology search engine VADLO. Its powerful search function and Cartoons are the measure of Chinese ingenuity.
November 12th, 2008 at 5:56 pm
@SKC,
I agree with your point:
This is also why I have been looking forward for the Chinese government to really take this opportunity to put some massive amount of resources into these much needed efforts. Prior to this crisis, such projects would be viewed as too risky in terms of overheating an already hot economy. But now that is surely not a concern any more. This reminds me of something said by the newly appointed white house chief of staff for Obama, something like, “this crisis is not something to be wasted.”
November 13th, 2008 at 5:00 am
I’ve read that many factories in China are shutting down because the market for their products has dried up overseas. So as a general question, I was wondering if anyone knew how much of what is Made in China is made for China, and how much is for export. You’d think that, with such a huge population, China would be CHina’s biggest market, save for the huge difference in buying power between “westerners” and PRC citizens. That’s something that’s been confusing to me. Western companies were tripping over themselves to gain access to the Chinese market, and the reason is often the 1.3b population. But you’d think the market would only be desirable if those 1.3b folks had buying power.
November 13th, 2008 at 5:41 am
Greedy capitalists is banking on the eventual buying of that 1.3b, I bet.
November 13th, 2008 at 2:49 pm
S.K., I’m not an expert but you can start by looking at the tax system and the tariffs. You do not buy a Ford imported oversea but buy one assembled in China. The Listerine you buy in China costs more than the same bottle in US. Some Chinese companies set up the headquarters in foreign soil to get the tax structure – the government is doing something to close up the gap between local and foreign corporations.
Using MP3 as an example again, the products compete in prices and features to the Chinese consumers. They know foreign brands are better quality but cost far more due to high tariffs. That’s why when the Chinese visit US, they buy a lot of cameras and electronic consumer products.
The thousands of factories closing is due to many incidents. First the lead paint problem in toys, and then the food… China does not have bankruptcy laws that well-defined. Typically, when a factory is losing big money, the owner runs away with all the cash s/he can get leaving workers unpaid and bad loans, then the government sells the assets and the workers are paid with a fraction of the salary.