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.
Apparently, the Chinese leadership is not too sanguine about economic prospects. I reprise Figure 1 from this post, which depicts the growth rate for China’s real GDP over the past 14 years.
Figure 1: 4 quarter growth rate in real Chinese GDP, latest vintage (blue) and August 2006 vintage (red). Source: CEIC (older vintage), ADB, and press accounts (newest vintage).The article continues:
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.”
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.
What this suggests is the Chinese leadership sees a somewhat more pronounced slowdown in growth than the IMF. The IMF’s revised outlook released Thursday indicates a 0.1 ppt reduction in 2008 y/y growth, and 0.8 ppt reduction for 2009 y/y growth. These are revisions relative to those released less than a month ago. Current IMF projections (as of Thursday) are for 2008 q4/q4 of 9 ppt, and 2009 q4/q4 of 8.3 ppt.
Originally published at Econbrowser and reproduced here with the author’s permission.