Mon, November 17, 2008
Business > Economy > 2008 G-20 Summit

Financial storm brings on China's 'New Deal'

2008-11-17 02:58:15 GMT2008-11-17 10:58:15 (Beijing Time)  China Daily

While China's successful story of weathering the 1997 Asian financial storm is still fresh in minds, the country is trying to repeat the feat once again, this time, on a much grand scale, a much faster fashion and against a much worse crisis.[China Daily]

While China's successful story of weathering the 1997 Asian financial storm is still fresh in minds, the country is trying to repeat the feat once again, this time, on a much grand scale, a much faster fashion and against a much worse crisis.

The State Council, or the Cabinet, unveiled a 4 trillion yuan ($586 billion) stimulation package on November 9 to help the country thwart the economic slowdown amid the worst global financial crisis since 1929.

The prompt and swift move will not only preserve the fruits of the country's 30 years of reform and opening-up initiative but also give the rest of the world a much-needed sentiment boost.

The massive economic boost package, which JP Morgan chairman of China Equities Jing Ulrich calls a "New Deal with Chinese characteristics", will tap 10 areas ranging from budget housing, rural and urban infrastructure to medical clinics and raising people's incomes.

The proposed stimulus investment, which is to be spent from now till 2010, will be implemented in a "swift, effective and forceful" manner, the State Council says.

"These unusually strong statements suggest that the authorities are very eager to boost private sector confidence through making a very strong commitment to maintaining strong growth," says Wang Qing, chief China economist with Morgan Stanley Asia.

Larger than 1997

The huge demand-boosting plan is similar to what China did during the 1997 Asian financial turmoil.

Scratch further, however, vast differences between them emerge.

"The sheer size of the package and the fresh focus on consumption side are the most striking features of the stimulus plan this time", says Shen Minggao, chief economist with China's leading business and financial magazine Caijing.

In the 4-trillion-yuan stimulus package, the central government will spend 1.18 trillion yuan by the end of 2010, Mu Hong, vice-minister of National Development and Reform Commission said last Friday.

"Even the 1.18 trillion yuan, not the headline 4 trillion yuan, is much bigger than the amount the central government spent in the aftermath of Asian financial crisis," says Shen, a former China chief economist for Citigroup Inc.

From 1998 to 2004, the central government issued a total of 910 billion yuan of long-term treasury bonds to finance the stimulus plan.

These were supplemented by 3.28 trillion yuan investment from other sources, contributing 1.5 to 2 percentage points to GDP growth then, according to Shen's estimates.

"This time, the central government is planning to spend 1 trillion yuan in each of the next two years, while last time it spent 910 billion yuan in six years," says Shen, who estimates the stimulus plan would contribute about 2 percentage points to China's GDP growth next year.

His view is shared by Morgan Stanley's Wang.

"The policy mix of 'proactive fiscal and moderately loose monetary policies' is stronger than the one adopted in the aftermath of Asian financial crisis," Wang says, referring to government's decision to shift the monetary policy from "relatively tightened" to "moderately loose".

In addition to its immense scale, economists say the stimulus plan covers several sectors that are clearly intended to prop up consumption, moving away from the previous focus on infrastructure investment.

The plan stipulates that investment will flow into welfare housing, healthcare services, education and other social safety net projects.

And the government will increase the purchasing price of grains and dole out subsidies to agricultural equipment, moves intended to raise farmers' income.

"This is a sparkling policy having improving people's lives incorporated into the stimulus package," says Sun Lijian, vice dean of the School of Economics at Shanghai-based Fudan University.

"Relieving people's concerns about housing, education and medical care spending will directly spur them to consume more," Sun says.

With consumption only accounting for about 36 percent of GDP and investment 42 percent in 2007, a well-primed fiscal pump will make a huge difference, economists say.

Consumption is an area China should strive to tap especially at a time when the exports, one of the main engines for country's economic growth, slows down in its growth, economists say.

China's dependence on exports has grown stronger after the 1997 Asian financial crisis. Exports accounted for 19.2 percent of the GDP in 1997, and the figure soared to 37.5 percent in 2007.

While the 1997 Asian financial crisis was mainly a regional one, the ongoing financial turbulence originated in US has become a global curse, dragging down US, Europe, Japan and other developed economies, which receive a lion's share of Chinese exports.

Exports grew 19.2 percent in October, down from 21.5 percent recorded in Sept and sharply lower than the recent peak of 26.9 percent in July.

And experts say the export growth will drop further in the coming months.

"The external environment for the Chinese economy has undoubtedly become more challenging than we originally envisaged," Morgan Stanley said in a note last week when downgrading China's GDP growth forecasts for 2009 to 7.5 percent from 8.2 percent, citing the smaller contribution of net exports (due to slower export expansion) to growth and weaker investment in the real estate sector.

"It may take much longer for China's exports juggernaut to pick up the pace again this time (than the country did in the aftermath of Asia financial turmoil)," Shen says.

Under such circumstances, Shen says it becomes natural and imperative for China to turn its eyes on domestic consumption.

"China pulled through the Asian financial crisis by increasing investment and exports, but this time it cannot pin its hope on exports so it has to ignite the engine of consumption," says Shen, who predicts China's GDP would grow at least 8.5 percent.

He says the government should also pay attention to raise the earnings of middle-income groups by lifting the individual income tax threshold.

The central government should also provide financial assistance to workers, especially the migrant ones, who lose their jobs in the economic slowdown, he adds.

Shen also suggests the country needs to further open its services sector such as telecom and aviation to attract investment and spur consumption.

And some economists say the massive investment plan this time may not be as effective as it did in the wake of Asian financial crisis to attract social investment on board.

The central government's investment in social welfare programs or rural infrastructure projects would not generate as much excitement for private investors as it does in urban infrastructure or transportation projects, Stephen Green, chief China economist at Standard Chartered Bank in Shanghai, tells China Business Weekly.

"It will be hard for those projects to attract private sector investors to be involved as returns on these investments will not be appealing enough," Green says.

"But it (investments in social welfare program) is a long-term shot which helps spur consumption," he says.

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