China - Expert: Stimulus plan to ensure a soft landing

China Information News
Expert: Stimulus plan to ensure a soft landing
8 December 2008

On November 9, the Chinese government announced that it will spent 4 trillion yuan (about US$570 billion) over the next two years to finance programs in ten major areas in an effort to boost domestic demand and spur economic growth. How will the 4 trillion yuan be spent? Will this stimulus package work as hoped? China.org.cn invited Ma Xiaohe, deputy director of the Academy of Macroeconomic Research under the National Development and Reform Commission, to answer these questions.

China.org.cn:

In early November, the State Council announced the 4 trillion yuan economic stimulus package. In normal circumstances the government would put forward its macroeconomic control policies at the Central Economic Conference held in December every year. Why did the government choose to announce the policy earlier?

Ma Xiaohe:

I think there are two reasons for this. Firstly, the Chinese economy is facing a very different situation this year. The current global financial crisis is having a bigger-than-expected impact on China and China was affected more in August and September than the first half of 2008. Therefore it would be too late if the government waited until the Central Economic Conference.

Secondly, the Chinese economy – in particular in the export industry, labor-intensive industries and capital-intensive industries – has seen a slowdown in growth. In this situation, the government needs to adjust its policy and it needs to do it early.

In an effort to cope better with global economic trend and maintain stable domestic economic growth, the government chose to shift its policy in November. And I think it was a necessary and timely move.

China.org.cn:

During the 1997 Asian financial crisis, the government also implemented a policy of stimulus. What's the difference between the 1997 plan and the current one?

Ma Xiaohe:

Back then, the government issued treasury bonds to raise funds for economic investment. In total, 3 trillion yuan was pumped into the Chinese economy. Most of the money was spent on infrastructure projects, including airports, roads and the power network. However, the ten major steps specified in the current 4 trillion yuan stimulus package are quite different. The first one is a welfare housing project, which includes rural housing reconstruction and building low-rent urban housing.

The second one is rural infrastructure construction. During the Asian financial crisis, rural infrastructure construction was not a key project – we focused more on larger projects such as highway construction. But this time, the government will step up efforts to promote the use of methane and to ensure drinking water safety for over 230 million rural residents. This part of the plan also includes more projects that are vital to people's livelihood – rural power grid construction, North-South water diversion projects, reinforcement of risky reservoirs, and water conservation projects.

The third step is the construction of railways, roads and airports. China built a number of these ten years ago, but this time we will try to improve the transport network. The government will invest in health and education projects such as improving the grassroots medical system and rural school construction. Back in 1997, we didn't have these kinds of projects. Environment projects were included on both occasions, but greater efforts will be made to address rural pollution, rubbish disposal and water pollution.

This time, the government will also provide policy support to enhance innovation and promote industrial structure upgrading.

Post-quake reconstruction is unique to the new stimulus policy. The government will invest 300 billion yuan in reconstruction projects. Also the current 4 trillion yuan plan contains some detailed measures to increase people's income in rural and urban areas, including raising minimum grain purchase and farm subsidies, increasing subsidies for low-income urban residents and so on.

The government has extended reforms in value-added tax regulations to all industries. Starting from January 1, 2009, the existing production-based VAT regime will be replaced by a consumption-based one, cutting the 2009 tax burden on companies by 120 billion yuan. The government has also enhanced financial support to spur the economy, including increasing lending to small- and medium-sized enterprises.

Compared with the 1997 economic rescue plan, I think the current plan focuses more on people's livelihoods and covers more areas – some projects can stimulate investment and others aim to increase people's income; some are funded by the government and others are supported by banks.

China.org.cn:

How long will it take for the plan to work?

Ma Xiaohe:

As I said, some of the projects can stimulate investment and some aim to increase people's income. These two types of project work differently. If you increase people's income, through minimum grain purchase, farm subsidies and subsidy for low-income residents for example, these policies will increase consumption and have a direct impact on the economy. Investment projects such as infrastructure construction will influence the economy in two ways. Firstly, these projects can boost the development of inter-related industries such as construction materials, iron and steel, and cement. Secondly, 40 percent of the initial investment will itself go into salaries and be consumed, so there will be a direct impact too. Over a period of time the rest of the investment will transform itself into fixed assets, which will then be added to GDP.

China.org.cn:

The current global financial crisis has delivered a serious blow to small- and medium-sized exporters. What are your suggestions to them? What should they do to adapt themselves to changes in the Chinese economy?

Ma Xiaohe:

It's hard to give suggestions that are sure to work. The government has raised tax rebates to help domestic companies experiencing difficulty in raising funds. In the 10 major steps, the government also encourages these companies to upgrade industrial structure by providing policy support to enhance innovation. But exporters do face a major challenge because the global financial crisis has caused a drop in global market demand. Exporters will have to make a huge effort if they want to survive these difficult times.

In my opinion, exporters can take advantage of the current financial crisis and turn it into an opportunity for innovation. For example, a company could look for new market sectors in which its products are unique. However, I don't think it's going to be easy for them because they themselves can do nothing about shrinking demand. So for the time being all they can do is to improve management and product quality and reduce cost. These can be effective ways to attract customers.

China.org.cn:

Could you make a forecast on China's economy in 2009?

Ma Xiaohe:

I think if these ten steps can be carried out, the impact of global economic recession on China will be significantly reduced. China's economic growth, which had dropped from last year's 11.9 percent to 9 percent by Q3 2008, will decrease at a slower pace. Also, China will come out of the phase of economic contraction quicker. Without the stimulus package, it might have taken four or five years for China to recover economic prosperity, but now three years may be enough. That is to say, the contraction period of the economic cycle will be shortened, the expansion stage of a new cycle will start earlier and the Chinese economy will land softly.

China.org.cn:

How will the government supervise the use of funds?

Ma Xiaohe:

The government has put forward relevant procedures to enable project overview. Inspection and supervision teams have been dispatched. I believe these steps will be well-implemented.

(China.org.cn by Yan Pei, December 8, 2008)