Will China's Aggressive Stimulus Succeed?

• March 4: Chinese Premier Wen suggested that the country's stimulus spending is having an effect supporting growth but announced no new spending
• Mar 6: NDRC plans to change the composition of the stimulus, reducing the share on infrastructure investment and increasing that on social spending. It plans a 300b yuan cut from an initial 1.8T yuan for infrastructure investments, such as low-income housing, and a 140b yuan reduction in spending on projects that focus on energy conservation and sustainability. technology projects would get an additional 210 billion yuan, while spending earmarked for rural public works projects and social welfare programs would rise 120b and 110b yuan.
• Total government expenditure in 2009 is about 2% of GDP
• Concerns were being raised about where the previously announced stimulus is being spent and reports suggest that NDRC may restructure the stimulus to spend more on
  
• Standard Chartered had said officials in Beijing had been discussing the possibility of raising the plan to Rmb8,000bn-10,000bn from the Rmb 4000bn announced in November 2008 - . In January the government released the second batch of funds - 130bn yuan (first batch 100 bn yuan in 4Q08).
• Citi: The front loaded program in which the government will speed up spending in 2009 suggests that more stimulus may be necessary to sustain growth in 2010. The lack of new spending signals that the government is giving more time for past policies to take effect
  

Details of the Stimulus to date
• China has been rolling out additional sector specific support packages that aim to support demand. There are concerns that Chinese investment may be exacerbating overcapacities in the Chinese economy especially through the use of tax rebates
• Nov 2008: 4 trillion yuan ($586 billion) stimulus, almost 1/5 of China's 2007 GDP, includes some previously announced spending. Government share is RMB 1.18T over next two years (1/3 of the package) with loans making up most of the rest. Targets investment in low-rent housing, infrastructure in rural areas, as well as roads, railways and airports as well as increasing purchases of grain to support the price and allow tax deductions for fixed asset investment as previously rumored. China has though rolled out new sector specific funding (autos, steel)
• HK: The stimulus package has a strong emphasis on rural development, as well as the less developed central and western regions including infrastructure
• half of the funds (1.8T) will be funneled to transportation infrastructure and power grid construction projects. 1T yuan will be used for earthquake reconstruction, and 370b yuan to improve rural livelihoods and infrastructure. Another 350b yuan for environmental protection, social security and housing will receive 280b yuan. 160b yuan for technological innovation and 40b yuan on public healthcare and education.(Caijing)

How Effective Will it Be?
• Pettis: instead of reducing China's export dependence, the opposite is happening. The stimulus isn't working because the money isn't going where it needs to go -- to household consumers and service industries, whose rising demand could absorb a greater share of Chinese production.
• WB: The stimulus policies provide an opportunity to rebalance the economy in line with the objectives of the 11th five-year plan, speeding up pension funding. government-influenced expenditure could contribute more than 4 pp to GDP growth (WB)
• AB: the ability of Infrastructure to stimulate growth may be limited. It must offset a contraction in property and manufacturing investment which account for a much larger share of growth and investment. China has been good at running a counter-cyclical fiscal policy in the past through and total stimulus might account for 2.5% of GDP
• Danske: Housing and infrastructure spending will probably have the greatest effect on growth
Zhou Xiaochuan: boosting spending at home is the best way China can help support global growthWB: In a more serious slowdown, a fiscal easing would be better suited than a monetary loosening, given the need to contain inflationary expectations, rebalance the growth pattern, and lower the current account surplus
• Zhou Xiaochuan: boosting spending at home is the best way China can help support global growth
• WB: In a more serious slowdown, a fiscal easing would be better suited than a monetary loosening, given the need to contain inflationary expectations, rebalance the growth pattern, and lower the current account surplus
• Risks: Reduction in revenues - expenditure growth was 30% y/y summer 2008. Government investment might boost overall output but do little at the micro level, exacerbating weakness in some regions (Citi) money may be circumvented to avoid defaults of SOEs

How Much New Spending?
• Lex: At most, half of the spending relates to new projects and the rest for projects that are underway; construction spending may kick in only by Q2-09 so some temporary unemployment is unavoidable. Spending by provincial govts. will be constrained by slowing revenues.
• Citi: The real incremental amount is more like RMB1-1.5 trillion, this could add 2-3 ppt every year to GDP growth in 2009 and 2010
• UOB: many projects delayed by the NDRC in recent years can now be green lighted, starting the stimulus effect quickly. Around 25% of investment projects are subject to the central government’s approval while the other 75% are subject to the approval of local governments

p/s photos: Ueto Aya