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China’s big economic stimulus package

November 9th, 2008 · No Comments

Just as we wrote that ultimately, the limits of monetary policy in a deflationary environment can be overcome with the help of a great public spending boost (guaranteeing that the newly created money will actually be spend and result in the purchase, and hence production of goods and services), out comes China, although not monetary financed, as this is not (yet?) necessary in China, which still has a sound budget and public debt position, at least until now. It’s a big plan as well, almost a fourth of GDP!

China Announces 4 Trillion Yuan Economic Stimulus (Update2)
By Li Yanping and Chia-Peck Wong

  • Nov. 9 (Bloomberg) — China announced a 4 trillion yuan ($586 billion) stimulus plan to spur expansion in the world’s fourth-largest economy, helping sustain global growth as the U.S., Europe and Japan teeter on the brink of recession.
  • The funds, equivalent to almost a fifth of China’s $3.3 trillion gross domestic product last year, will be used by the end of 2010, the Beijing-based State Council said today on its Web site. China will adopt a “pro-active fiscal policy” and pursue a “moderately loose” monetary policy, it said.
  • “We have long-awaited this stimulus plan,” said Ken Peng, an economist at Citigroup Inc. in Shanghai. “The measures may stimulate domestic demand, but they won’t prevent China’s economy from slowing further as the global economy is certainly in a recession.”
  • China is taking steps to bolster its economy, the biggest contributor to global expansion, less than a week before Premier Wen Jiabao goes to Washington for talks with world leaders on ways to address the economic slump. People’s Bank of China Governor Zhou Xiaochuan said yesterday boosting spending at home is the best way China can help.
  • China accounted for 27 percent of global economic growth last year, more than any other nation, the International Monetary Fund said in a report in April this year. Taiwan, which counts China as its largest trading partner, today cut interest rates for the fourth time in two months after exports dropped in October by the most in three years.
  • “Over the past two months, the global financial crisis has been intensifying daily,” the State Council said in today’s statement. “In expanding investment, we must be fast and heavy- handed.”
  • Housing, Infrastructure
  • The package announced today, of which 100 billion yuan is earmarked for this quarter, will go toward low-rent housing, infrastructure in rural areas, as well as roads, railways and airports, the State Council said.
  • The government will also allow tax deductions for purchases of fixed assets such as machinery to stimulate investment, a move that will reduce companies’ costs by an estimated 120 billion yuan.
  • In addition, grain purchase prices and subsidies for farmers will be raised, as will allowances for low-income urban households. The government also scrapped loan quotas to help boost lending to small businesses.
  • The stimulus plan may boost China’s economic growth by 2 percentage points next year, said Xing Ziqiang, an economist at China International Capital Corp. in Beijing. UBS AG and Credit Suisse AG before today’s announcement forecast expansion of no more than 7.5 percent for next year, which would be the slowest in nearly two decades.
  • Manufacturing, Property Slump
  • Wen is trying to stop China’s economic slowdown from deepening as exports wane, manufacturing contracts and a property slump undermines domestic demand. The central bank has already cut interest rates three times in two months, reducing the one-year lending rate to 6.66 percent.
  • Manufacturing contracted by the most since at least 2004 in October and export orders dropped to their lowest, according to CLSA Asia Pacific Markets. Home sales have plunged in major cities including Beijing and the stockpile of unsold new vehicles was at a four-year high in September.
  • “The golden years have shuddered to a dramatic halt,” said Stephen Green, head of China research at Standard Chartered Bank Plc in Shanghai.

It will, in all likelihood, not arrest the slow-down, but it will certainly mitigate it. Export is 40% of GDP, with investment at least another 40% and much of that related to manufacturing for export, so a slowdown in export really is a big drag on China.

And property prices is another worry, any significant downfall there will affect the health of the financial sector. But it’s good to see that the government is pro-active, and this plan is, well, rather substantial.

Tags: Credit Crisis · Emerging Markets