China - Economic planner unveils stimulus breakdown

China Information News
Economic planner unveils stimulus breakdown
27 November 2008

The National Development and Reform Commission (NDRC) lifted a veil on the government's 4-trillion-yuan stimulus package at a press conference this morning.

This has not only reaffirmed the government's commitment to reviving the economy, but more importantly, clarified the direction and application of the funds earmarked in the stimulus package.

Against the backdrop of yesterday's unexpectedly steep cut in interest rates by the central bank, the NDRC move shows the central government has reached a widely-expected consensus as to how to bail out the economy that risks going down to as low as 7 percent in the fourth quarter. Just a year ago, it was soaring at nearly 12 percent to stir the fear about overheating.

On November 9, China's nearly US$600 billion economic stimulus package did provide a shot in the arm of the market. But that policy framework seems to have been kicked off without much deliberation and details. In the following days, the local governments provided much bolder investment plans that amount to US$2.6 trillion.

Although the ambitious investment pledges have aroused a knee-jerk reaction in the capital market, people are not sure to what an extent the central policymakers have been determined to carry out those plans and whether the central and local policymakers can ultimately make it. The recent lacklustre performance of the domestic A-share market is a clear reflection of that lack of confidence.

Moreover, those investment plans have focused mainly on infrastructure with a view of using government spending to get private investors involved so that the fixed-asset investment level would not drop too drastically as exports are set to fall sharply next year.

However, they will not do much to help the corporate sectors and ordinary consumers. Closure of factories would lead to unemployment, which in turn would further reduce consumption.

Yesterday's interest rates cut, which moves in the right direction, will in particular help the real estate sector and cut the borrowing costs of enterprises across the board; meanwhile, it will cut the interest costs of individual home-buyers who borrow from the banks by as much as US$50 billion, based on mortgage lending figures by this March.

The next step should be focused on the taxation policies to cut taxes for both enterprises and individuals. It would be the most effective way to stimulate domestic demand. Only when the well-being of enterprises and individuals improve can confidence in the overall economy be restored.

The NDRC has vowed in today's press conference to further improve the income of retirees and the poor. It also said the authorities would take more measures to boost consumption and reform the taxation regime to reduce tax burdens of enterprises.

It, together with the interest rates cut, sends a clear signal that the policymakers are not only determined to do the right thing, but knowledgeable how to do it.

(China Daily November 27, 2008)