The Chinese fiscal stimulus has provoked much debate since being announced last Sunday as analysts try to assess its impact. Will it succeed in cushioning China’s economic performance, will it contribute to more domestic imbalances? a first area of debate fixates around how much of the investment to be approved is “new” that is not included in the current 5 year plan and budgeted as such. Around 1/3-1/2 of the projects seem to be new, previously unannounced spending while much of it is a compilation of initiatives already announced or items that were already scheduled in the current five year plan.
Details of new spending have focused on the infrastructure investment and include:
120b RMB ($18b) new spending in Q4
an extra 200b RMB for earthquake reconstruction in 2009 (up from previously planned 1T). The Total 1.2T RMB may be included in the 4T RMB headline figure.
extra 500b RMB on the railroads
VAT reform (previously rumored to be phased in by the new year which might encourage businesses to make more capital investment). This might reduce revenues by 100-120b RMB (perhaps this doesn’t exactly fit as fiscal stimulus, but rather is part of tax policy changes) Undisclosed amounts to support grain purchases to boost prices for rural farmers, undisclosed additional social spending (transfers to social security fund, health care transfers) The latter two groups of policies are longer term in focus than the infrastructure spending and are designed to support consumption, a key element of China’s sustainable growth trajectory in the future. Indicators of Chinese private consumption show a mixed story. Retail sales remain robust – they averaged 22% y/y growth in October, matching the June –October average. But such an outlook doesn’t seem sustainable with the industrial production at a 7 year low, export orders being cancelled. With profits down and the negative wealth effect of the equity and property market, private consumption will likely suffer – meaning China still may still not account for much global final demand. As such the stimulus may have the most boost on producers of natural resources, rather than on producers of consumer goods.
The net result of the new stimulus will be a further ramp up of infrastructure investment perhaps rising as high as 38% of GDP from the 6-7% of recent years, contributing 2.5ppt to GDP growth in 2009 (Morgan Stanley). Other estimates suggest that the new spending will add somewhere between 1-1.5ppt to GDP helping to offset other weakness. This seems about right – as does the lower end of the now consensus 7-8% forecast growth rates for 2009. But despite the stimulus, 6% growth still does not see out of the question.
Note the following text has changed slightly since initial posting.
Furthermore, it will be important to watch if the implementation of the stimulus exacerbates ongoing dynamics. As Victor Shih points out, regions that are more developed may actually be better able to open the spigot as they are more likely to have projects ready to go. Whlle supporting coastal regions hit by factory closures is likely a focus of the stimulus, it may still obscure micro level disparities. Regional and local level investment already accounted for 75% of total infrastructure investment, meaning that they will be responsible for such projects once approved by the federal government And local level authorities are more cash strapped than those at the federal level in part because they are hard hit by local property market weakness (so they will turn to the banks) The government is optimistic. It suggests that the new federal spending of 120b RMB plus local government and private sector spending could take the aggregate total to 400b RMB in Q4– or over 5% of Q407 GDP.
Key regions will clearly be prioritized – media reports suggest that governments in 12 key regions are estimated to approve spending of over 1.5T RMB in the coming 100 days as race to spend accelerates. Many of these projects may have been slated for coming years or may have been mothballed as part of past efforts to avoid overheating, conveniently now providing a pipeline.
Furthermore, should the plans not have the desired effect and macro outlook worsen, China may further scale up fiscal and monetary responses. Doing so might require significant borrowing – fiscal revenues actually slipped in October. Financing
This increased spending does come at a time when spending growth was already outstripping revenue growth as lower corporate profits, lower volume on property and equity market trades eroded revenues. However, China may be able to avoid a large fiscal deficit – estimates suggest anywhere from 1-2% of GDP next year.
Funding will be split between new debt issuance, which has been lower this year to date and bank lending.
Banks will likely be persuaded to go along, and having held back from investing in property because of the credit risk, they may have more funds to lend. The government seal of approval will likely greenlight funding. .The government already removed credit controls and has been urging banks to lend. However, banks and others will have to be careful not to create a new vulnerability while responding to an old one – There is a danger of a return of policy based lending and NPLs. And to support private consumption, getting capital to the SMEs will be very important.
There has been no shortage of discussion on the role China, the US largest creditor and holder of the largest foreign exchange reserves might play. It is striking that Asia, the largest global surplus region has been relatively absent in global discussions so far, this might change this weekend and in months to come. But for now key asian economies may be more focused on domestic not global concerns despite the looming vulnerabilities stemming from further slowdown in the US, Europe and commodity exporting economies. But at least some of what is good for China, might be good for the world.
The timing of the Chinese package is likely influenced both by domestic demands, and the external outlook. The timing before the G20 heads of state is clearly significant. Though its interesting to note that the Chinese finance minister flew home from APEC and did not attend the G20 finance ministers meeting in order to take part in finalizing this package. Yet especially for exports, worse news seems likely ahead. Chinese infrastructure demands might therefore put a floor in falling commodity prices, particularly as the credit crunch and falling demand may depress investment.
Chinese officials have suggested that the best way China can support global demand is to help itself, to support its own economy and (hopefully) to do so in ways that support its long-term development and sustainable growth pattern. It is striking that the current stimulus includes both tried and tested measures of scaling up infrastructure but also social spending that may contribute to rebalancing China’s domestic economy in years to come. Or so one hopes, the balance of these two is still skewed towards infrastructure spending. Either way, it looks like a tough year ahead. But hopefully one in which we can revisit institutional structures, finally insert emerging economies into global regulatory bodies to better respond to the next crises.