|China’s stimulus package, announced this week, focuses on more than just building up the industrial and export capacity. Some investments will also be in housing, schools, and health facilities.|
China announced a massive stimulus package of 4 trillion Yuan (US$570 billion) this week, to aid its ailing economy. The move was quickly welcomed by World Bank President Robert Zoellick: "China is well positioned given its current account surplus and budget position to have fiscal expansion," said the World Bank chief at a news conference. "I am delighted that China decided not only to undertake these steps, but to announce it before the G20 summit," he added.
Basically, I think that the package is very good. It is not as big as it looks at first glance, but then the economy is not as bad as many people think. Real retail sales for October came in at 17 percent growth rate, down trivially from 18 percent in September. Exports in October were up 19.2 percent over the year before. There is definitely evidence of a slowing economy, but nothing too dramatic has happened so far. Worrying signs, such as a sharp drop in growth of electricity demand in October, suggest that heavy industry is slowing. And imports for processing have slowed to a 2-3 percent growth rate, indicating that processing exports will slow down sharply. We have said for some time that China needed to be ready with a stimulus package toward the end of 2008 as global conditions would likely lead to a slowdown, and that time has come. I see the current move as precautionary, in light of some worrisome signals, rather than as reactive to a highly deteriorated situation (as suggested in some of the Western press coverage).
Given that the overall economy still has many areas of strength, it is good that the stimulus package is not as big as headlines suggest. The 4 trillion Yuan is spread over more than two years; it includes some projects already included in revised budget plans; and much of it will be financed by bank lending, so that part is not in fact fiscal stimulus. It is hard to discern exactly what the fiscal stimulus is, but I reckon it is in the range of 2-3 percent of GDP. The exact size is not important. The key signal from the authorities is that they will provide whatever stimulus is needed to keep the economy growing at a healthy rate of 7 percent or higher, and they have the fiscal space to do so. The government has run a fiscal surplus in recent years, has low domestic debt, and also owns the $2 trillion of reserves that have been built up. So, there is plenty of scope for fiscal stimulus.
Concerning the composition of the package, I only half agree with the commentary in the Western press that finds the package too focused on traditional infrastructure. The Financial Times, for example, welcomes China’s stimulus, but adds that it “is taking the wrong form. Rather than trying to prop up the Chinese economy as it was, this is an opportunity to turn it into the economy China wants -- one where consumption at home has more than a cameo role. The government must seize it.” The point in the FT and other commentary is that the package seems overwhelmingly focused on infrastructure investment. True. But there is infrastructure to gin up the export machine and infrastructure aimed more at domestic consumption and needs. (In practice, it is hard to make an exact distinction, but the concepts are useful.)
For example, the stimulus package expands a previously planned railway investment program of 300 billion Yuan to 500 billion in the next two years. Now, the good news is that China has well-prepared plans for the railway expansion; some of this has been put on hold for the past two years because the economy was on the verge of overheating. In the new global environment these plans can now be accelerated. The centerpiece is a new high-speed passenger line from Beijing through central cities to Guangzhou.
The main purpose of this dedicated passenger line will be consumption -- tourism and leisure. It is the same for the accelerated investments in water and sanitation and urban transport. These investments will raise the quality of life and not have much direct effect on the country’s production capacity. Also, some of the investments will be in housing, schools, and health facilities. So it is not fair to portray the investment program as primarily aimed at building up the industrial and export capacity of the country.
That said, I partially agree with the criticisms because most of the government spending seems targeted at investment. Government spending on the provision of health and education services is considered consumption. There is plenty of scope in China to increase public provision of these services. The government has also made good progress developing a minimum income support program (dibao). The stimulus package is not going to prevent a lot of enterprises from closing or workers from losing their jobs. China has too many factories in sectors such as toys and footwear, and the stimulus package cannot keep these afloat. So it will be important to support workers through the dibao program and other safety nets. If the government puts more money into these programs and expands social services it will reduce the insecurity of households and encourage them to spend rather than save more of their income. And the stimulus program will create jobs in new sectors.
The global economic crisis is an opportunity for China to reorient its growth model away from so much dependence on exports and industry, and more toward dependence on domestic needs. This includes private consumption, but also includes public spending on social services and on enhancing the quality of life through environmental clean-up and public transportation. The stimulus package is certainly a start in this direction.