Sunday, November 9, 2008
China Sets Big Stimulus Plan In Bid to Jump-Start Growth
BEIJING -- China unveiled an economic stimulus program it billed as totaling $586 billion, aiming to bolster domestic demand and help avert a global recession. Though the two-year package appeared to include some previously announced measures, its size was clearly designed to revive the fading confidence of Chinese businesses and consumers, and impress foreign governments. The announced sum of four trillion yuan represents about 16% of China's economic output last year, and is roughly equal to the total of all central and local government spending in 2006. New spending of even half that amount would be substantial next to China's six trillion yuan annual budget for this year. The plan includes spending in housing, infrastructure, agriculture, health care and social welfare, and features a tax deduction for capital spending by companies. China's economy won't be able to absorb so much spending immediately: Economists expect one or two more quarters of slowing growth at a minimum before a rebound could take hold. With the announcement, China will enter a meeting Saturday of the Group of 20 largest economies with a plan that would dwarf stimulus measures by others in the group, which is convening in Washington to discuss ways to stem a global slowdown in growth. The U.S. pushed through a $168 billion stimulus package earlier this year, equal to about 1% of gross domestic product, and the Federal Reserve has aggressively cut interest rates, complementing the Treasury's $700 billion for troubled financial institutions. Japan has a $51.5 billion package that largely consists of payouts to families and tax relief for businesses, and Germany is moving on tax breaks and loans that will cost the government around $29.9 billion over four years. Finance ministers and central bankers meeting this weekend in São Paulo in advance of the G-20 summit discussed the need for fiscal stimulus to fuel economic growth, U.S. Treasury Under Secretary for International Affairs David McCormick said Sunday. He called the Chinese announcement a "welcome step." If the stimulus package can help alleviate a slowdown in China's housing and investment boom, that could help cushion decreases in Chinese purchases of raw materials and goods from the U.S. and other developed nations. While the outlook for China's once-booming economy has rapidly worsened, the country remains comparatively well-placed to deal with a slowdown. The boom years have been kind to China, allowing it to clean up its banking system, return state enterprises to profitability and shore up government finances. Now the state is putting its significant financial resources -- including a budget that for the moment is still in surplus -- into play to shore up the economy. China's economic growth has slowed to the weakest pace in five years, with output expanding just 9% in the third quarter from a year earlier after gaining nearly 12% in 2007. That is still fast by the standards of any other country and helps show why China is important to maintaining a decent pace of global economic expansion. China's government has long held that growth of at least 8% is needed to provide the improvement of employment and incomes that the ruling Communist Party relies on for popular support. China's financial system remains largely unscathed by the global credit squeeze, but prospects for the country's continued growth at that kind of pace have deteriorated rapidly. Export orders from the U.S., Europe and Japan are weakening, causing factories around China to trim work forces or shut down entirely -- leading to unemployment that could undermine popular backing for the government. Spooked urban consumers are pulling back from China's housing market, causing new construction to collapse to its worst level in a decade. With construction weak, support for other key industries such as cement and steel has eroded, and they are cutting output and canceling orders for raw materials -- moves that are being felt by commodities firms around the world. The downward spiral in confidence is likely to depress growth even further. Among foreign businesses that rely on a healthy Chinese economy, suppliers of metals and machinery for infrastructure construction and companies that target Chinese consumers will be closely watching the effects of the stimulus program. The program was announced Sunday night in Beijing just before the scheduled release of economic data for October that are expected to show a further sharp deterioration in activity. China's leaders "realize this is really about sentiment and confidence, which needs a very fast and strong policy response," said Wang Qing, an economist with Morgan Stanley. Based on recent trends and without a policy response, China could have seen 5% to 6% growth next year, according to Mr. Wang. With stimulus measures that include previous moves to cut interest rates and end caps on bank lending, he said China now has good odds of achieving the 8% to 9% growth in 2009 that officials still say they expect. Other governments around the world are also considering fiscal-stimulus plans to boost their economies, something the International Monetary Fund has encouraged. U.S. lawmakers, during their lame-duck session next week, are expected to consider a stimulus package focused on aid to local governments and extended unemployment benefits. House Speaker Nancy Pelosi is pushing for a two-step plan with as much as $100 billion this month followed by a companion measure early next year that would include a tax cut. Outside economists are urging Democratic congressional leaders to move a much larger package than now being considered: as much as $300 billion, or 2% of U.S. economic output. China's plan appears to be comparable in size. In a statement announcing China's plan, the State Council said it would deliver 120 billion yuan ($18 billion) of new spending in the last quarter of this year alone. The State Council -- effectively China's cabinet -- estimated that would drive an additional increase of 400 billion yuan in local and private-sector investment throughout the economy. China's government is also making plans for new spending in areas such as low-cost housing, road and rail infrastructure, agricultural subsidies, health care and social welfare over the next two years. Beijing has long used infrastructure investment to stimulate growth. In recent years, spending on everything from public works to housing to factory equipment has accounted for about four to six percentage points of China's 10% average annual growth rate. Spending on infrastructure such as highways, ports and power plants amounted to more than $400 billion last year, on the heels of $42 billion Beijing spent preparing for the Summer Olympics. In the new stimulus package, total new investment could be less than the headline figure of four trillion yuan, since the plan does appear, for instance, to incorporate rebuilding programs for the areas affected by May's massive earthquake. Those have already been allocated one trillion yuan in funds. Although Chinese officials have been meeting daily on the financial crisis, most observers hadn't expected leaders to reach final consensus on a stimulus plan until an annual economic-policy meeting scheduled for the end of this month. The rapidity of the response underscored the government's concern about the growing risks of a real downturn. China has also joined in international calls to revamp international financial oversight and address faltering business and consumer confidence. President Hu Jintao will visit Washington later this month for the G-20 summit, and is expected to meet President-elect Barack Obama. On Saturday, in their first telephone conversation since last week's election, Mr. Hu told Mr. Obama that China "attaches great importance" to the summit and called for efforts to strengthen international financial regulation, China's official Xinhua news agency reported. Economists said China's new stimulus plan represents an even more dramatic policy response than China adopted in 1998 during the Asian financial crisis, when Beijing spent heavily to counter a similarly worrisome combination of an external financial crisis and a sharp domestic slowdown. "As the global economic and financial crisis has become more severe in the last two months, China must take flexible and prudent macroeconomic policies to resist the negative impact of the international situation and deal with these complicated and ever-changing trends," the State Council said in its statement. The new measures include an expected revamping of China's value-added tax system to allow all companies operating in China to deduct spending on capital equipment. The government estimated the new system, which is already in place in some provinces, would save companies a total of 120 billion yuan when fully rolled out. The government has recently been phasing out tax breaks specifically for foreign companies to invest in China and didn't mention any such measures as part of the stimulus. Economists say the change to the tax system is unlikely to encourage businesses to invest if they are doubtful about the economic outlook, which is likely one reason why the stimulus plan emphasizes new spending. Another question is how quickly the effects of the stimulus package will be felt in the real economy. While the government's statement included language urging local officials to rapidly put new money to work, some lag is unavoidable. And since infrastructure spending has already been growing by about 20% annually for the past couple of decades, there may be physical and logistical limitations to how much spending can be further accelerated. "I don't doubt the government's ability to support growth. However, the timing is challenging, as the speed of domestic demand may correct faster than fiscal policy can be eased," Ben Simpfendorfer, an economist for Royal Bank of Scotland, wrote in a report last week. The government is presenting the program as an opportunity to do many things that would be worth doing anyway. Those include helping companies upgrade to higher-tech equipment, improving irrigation in rural areas, raising pensions and social-security payments, and improving water and waste treatment in cities. China can afford to spend. With tax revenue up more than 30% last year, central and local governments ran a combined surplus equivalent to 0.7% of GDP.