China Unveils Major Stimulus to Economy

Posted by: Frederik Balfour on November 9, 2008

China has finally unveiled a long-anticipated economic stimulus package of about $585 billion dollars to be spent by the end of 2010, amounting to a whopping 16% of GDP according to Morgan Stanley. It also includes a revamping of the value added tax that should provide manufacturers much needed relief in the face of slack exports and domestic demand. In addition, the government on Sunday announced the abolition of loan quotas on banks while economists expect future interest rate cuts to ease liquidity constraints.

In what JP Morgan chairman of China Equities Jing Ulrich calls a “New Deal with Chinese characteristics” China is in a strong position to goose growth. With nearly $2 trillion in reserves and a budget surplus, it can well afford to undertake an ambitious spending program on railways, roads and other infrastructure projects. The package comes on the heels of an announcement that economic growth in the third quarter had slowed to 9%, compared with 12% a year earlier. Economists were expecting China’s growth to slow to as little as 5.8% in the fourth quarter according to Credit Suisse, well below the 8% level regarded as necessary to generate enough jobs to accommodate new entrants into the labor force.

That’s particularly important to Beijing which is terrified of the consequences of a restive class of unemployed workers. Hundreds of millions of migrant workers from China’s heartland have found jobs in the factories and construction sites of southern Guangdong province and Zhejiang on the country’s east coast, but rising bankruptcies and idled cranes have swelled the ranks of jobless workers in recent months. Last week the CLSA China Manufacturers Purchasing Managers Index fell to a record low of 45.2 in October, indicating widespread contraction of their business, which accounts for about 42% of GDP.

But whether the package will be sufficient to restore consumer confidence remains to be seen. The wild card here is the housing market, which is just beginning to tailspin. It accounts for 25% of fixed investment, and is a principal form of wealth holding for Chinese whose only other choices are bank deposits [which offer a negative real return] and the shaky stock market, down some 65% this year. Property sales have plunged in recent months as buyers anticipate falling prices, which in turn has led cash- strapped developers to slash prices in a self-fulfilling prophecy.

China will no doubt get a good bang for its buck with the new package. With consumption only accounting for about 36% of GDP and investment 42%, a well-primed fiscal pump will make a huge difference. Stephen Green, chief China economist of Standard Chartered Bank expects the stimulus package could add as much as 3.5 percentage points to China’s growth next year, just enough to keep it close to the magic 8% growth mark.

Reader Comments

Buy what from USA return?

November 10, 2008 12:59 AM

That will be the real question since the real patient is USA. China's stimulus package may be just short term pain killer after all.

Gene

November 10, 2008 1:05 AM

Note that a lot of things in China are not straightforward. The real growth has been 13-16% but has been reported as only 9-12%. The gray economy is as large as 40% of the visible economy. Many people (especially business owners) make $100,000+ a year but report only 5-10% of their income so they can avoid taxes.

To Gene

November 10, 2008 4:12 AM

Such things exist in any country and exist all the time. So the growth rate is quite reliable since they are based on reported stats all the time.

Andy

November 10, 2008 5:40 AM

Funny, the western journalists have predicted the collapse of China for years. Yet today they desperately expect China to come and pull them from their sinking ships.

Peggy Sue

November 10, 2008 7:42 AM

It seems that every 8 years we go through this. A person should not live outside his finacial means even to better his living status. Our Government will resolve this and work this out or there will be alot of people suffering that depend upon credit cards and bank loans for what they have in their lives. I was raised and taught to pay cash for what you want and save everything you do not have to spend. If more people around the world would realize this we would not be in this situation. The best thing to do is not panic and have faith that it will be alright in all areas of concern. Think, Listen and Do!.

agree with Andy

November 10, 2008 8:12 AM

Totally truth, this society have been struggling with negative economic predictions and till 2006 I would make my predictions not far from theirs, but now being here learning about this culture it doesn't surprise me that the west is waiting for the Chinese gondola to rescue not only Asian market but theirs too, let see what really this new American government finds as a common ground so we all won't have to start relying on speaking chinese as the final level of the silent dragon takeover...

James Mason

November 10, 2008 8:16 AM

Andy is quite right about that. I guess their hope was that China would spend $600 billion directly on salvaging Western economies. The West does not seem to get it yet. Asia and the Gulf states are getting rather tired of having the West tell them what to do all the time. It does not seem to have registered in the West as yet that the colonial era is done and gone.

Squeezebox

November 10, 2008 11:30 AM

Chineese laborers did a good job of building the American Railroads back in the nineteenth century. It's about time they were given the chance to build another world-class railroad for themselves!

Lisa

November 10, 2008 12:08 PM

Hmmm, I wonder how much of China's stimulus package will end up in the local officials' pockets?

jose

November 10, 2008 1:12 PM

@Gene: can you substantiate your statistics?

to lisa

November 10, 2008 1:30 PM

- you mean the bush administration and its wall street allies are now working in china?

Downs

November 10, 2008 1:33 PM


Tne significance of this package is to compensate China's slowing economy, due to the weakening exports to such as US or Europe, with boosting the domanstic damends. There is such a huge requirement of spendings on agriculture and infrastructure domastically that China's economy could be adequately sustained without slipping into a major recession. China does have many advantages, compared with US, for a package such as this to succeed. First of all China has maintained a very high level of personal savings. With China's economy being stablized, the Chinese consumers' willingness to spend would likely maintain. The weakening housing market is bad, but could also create an opportunity for many Chinese who have not owned a property yet. And I also doubt how much slowdown China's exports could be experiencing. Probably not a whole lot. Cheap Chinese goods could become even more favorable in the time of the worst world economic downturn.

TO lISA

November 10, 2008 3:25 PM

Lisa meant the same as The C.E.O of the
West? That will be very sad.

@Lisa

November 10, 2008 3:52 PM

At least it won't end up in Wall Street bankers' pockets. Locall Officials are small holes to feel comparing to American financial industry, the biggest black hole invented by you know who.

jcage

November 10, 2008 4:54 PM

While China invest in its infrastructures and provide finance to small and medium business and education and low cost housing for the poor, the USA stimulus package is aimed mostly to bank and financial firm in other world to Wall Street people and very little for the people on Main Street!
There is a saying that if the USA sneeze the world would catch a cold and we are going to find out if it still true or not! The world European and Asian stock market have been going up even when the Dow Jone and NASDAQ were falling so let's see this trend continue !

To Lisa

November 10, 2008 5:38 PM

I have the some concern as Lisa, especially as a Chinese. The spending, if the government uses it well, e.g. on education, health care and environmental protection as they promised, will give China a chance to convert from export-oriented economy to self-sustained one. Let's see how it works. By the way, I disagree with the U.S. bailout giving cash to those corrupted banks.

To Lisa

November 10, 2008 5:38 PM

I have the some concern as Lisa, especially as a Chinese. The spending, if the government uses it well, e.g. on education, health care and environmental protection as they promised, will give China a chance to convert from export-oriented economy to self-sustained one. Let's see how it works. By the way, I disagree with the U.S. bailout giving cash to those corrupted banks.

jason wong

November 10, 2008 6:40 PM

I totally agree with Lisa. That's the first thing I thought of when I heard about this. Sad, sad state of affairs in the homeland. Hopefully the newly formed anti-graft team can make sure these funds go to the proper parties and not be funneled through the dirty hands of corrupt officials. Very pessimistic about this though...

China may stifle the world.

November 11, 2008 1:58 AM

China's reckless stimulus may stifle the rest of the world. Note that China's appetite for resources and energy may boost commodity price sky high again, while the rest in ression. This will be extremely difficult for the world.

chenleilili

November 11, 2008 3:48 AM

to "China may stifle the world ",firstly,the biggest appetite for energy is from U.S.,secondly,do you think that Australia and Brazil,Chile and so on can enjoy their fast development without China's comsumption?Chinas stimulus is not only good to its economy,but also will make contribution to the world econmy,energy saving does not mean not to use energy any more,use resources and energy well instead of keeping them like antique.

Henry L.

November 11, 2008 6:10 AM

I think this stimulus is meant to only help China withstand this worldwide financial meltdown which originated in the US. In the process of helping itself, it may end up helping other countries. I do not think that China can help the world on its own because its economy although large but not large enough to make a big difference. The US, with it's enormous economy must try to find a way to fix this problem but to fix it, the rest of the world must work together.

One man's gain NOT another man's loss

November 11, 2008 7:39 AM

"Necessity is the mother of invention."

The era of greatest American innovation was possibly the 1880s to 1920s. More changes in lifestyle occurred in those 40-some years than in probably any other period in history. Look at the life-changing inventions that became the commonplace in those years: electric light, telegraph, telephone, radio, automobile, airplane, assembly line, refrigeration. These new inventions were the foundation for great changes in the following decades, during which the basic ideas were refined, but not replaced. Television was an improvement upon ideas which emerged in the first few decades of the 20th century. Plastics, vaccines, antibiotics, and the computer were the next big ideas developed during the next 40-year span. For the last 40 years, nothing essentially new appeared and the lifestyle remained fundamentally unchanged.

A good ping-pong player plays better when playing with another good player, better than he would play while playing against an amateur. If the game is too easy, he loses interest and never reaches his peak performance.

As long as there is the current unnatural economic imbalance, innovation is stifled. Patented ideas are not rolled out because they are not economical. America is at its best when it innovates, instead of being relegated to the roles of brand-maker, marketer, or paper chaser. I think the development of nations will spur further innovation, and that America may just again lead the world in the next step of our journey together.

"Fear is the mind-killer."

(Oh, and I thought it ironic that the above comment decries using treating FOSSIL fuel as if it were like ANTIQUES.)

@Henry L.

November 11, 2008 9:14 AM

According to the plan, those money will be spend into 10 major fields, I saw the list maybe some foreign firms can get orders.

Steven

November 11, 2008 11:23 PM

Some new data for Oct. :

1. China's domestic retail sales grew by amazing 22%,
2. China's export grew by around 20%.

chenleilili

November 12, 2008 3:58 AM

to “One man's gain NOT another man's loss“

I do not think it is ironic to compare the energy with antique,both have long history,to some extent,antique is useless to the real econmy and just a tool for the rich to have tax evasion.If human spend a lot of money to produce and reserve but not use energy,what is the big difference between antique and energy

Optimist

November 12, 2008 9:11 AM

....and it is already clear that it will not succeed in stemming the financial rot. Look at how stocks tanked inspite of the so-called stimulus packages.

Stimulus packages are like drugs, it gives an immediate high and then it shatters the body (the economy is this case). China's economy is based on FDI and high savings.

Stephen

November 12, 2008 7:47 PM

To "China may stifle the world." that you can't even put your penname above your comment. As an Australian who clearly has benefited from China's resource demand over the last five years, I can clearly see you don't understand economics. China alone can't drive up the commodity price, not within this current environment where other major economies are in recession. That is why three major iron ore producers (two of them are from Oz) have cut down their productions, BHP e.g. by 10% by the year end while China is still importing. Justling for resrouces and most importantly speculating on the commodity market which Wall Street does the best play a critical role in driving up the commodity price. China alone isn't capable of orchestrating pricing hikes as her best interest can't be either.

tony

November 12, 2008 9:12 PM

It's much too soon to dismiss the stimulus package and say it doesn't work. Give them some time to implement the package. Then you will see the real results.

Stock markets reactions in the short term should not be taken seriously, in fact they often act irrationally.

Newbie

November 13, 2008 12:13 AM

@ Steven,

Here's some more data:

China's factory output at a 7yr low.

Look at Japan. It is giving $ 160B to IMF. Now that's what I called doing something for the rest of world. While China is selfishly just trying to save its own economy (that too unsuccessfully). The irony is Japan does not have seat in the UN Security Council, but China has.

Optimist

November 13, 2008 2:20 AM

Looks like the China stimulus plan is working exceptionally well, albeit in the opposite direction. The stock markets continue to touch new bottoms.

Here's a classic example of being efficient but ineffective.

jcage

November 13, 2008 2:43 AM

Newsbie

Japan is the 2nd biggest world economy and China is still a very poor country when compared with Japan.
China trade with a lot countries by selling and buying good around the world and this trade help the world economy. Every countries are helping to overcome this world economic recession while some country is only good to put down other and tooth their little horn!

WhoCares

November 13, 2008 10:10 AM

Agree that China is far poorer to Japan. However, it is not that poor that it could not give $ 2B to its 'all-weather friend' Pakistan.

BTW, what happened to all that $ 2T foreign exchange that China has?

To All

November 13, 2008 8:34 PM

I have to agree with 'WhoCares' and 'Newbie'.

Consider this. When it comes to being treated like a major economy and all the authority that goes with the status China expects to be treated at par with Japan. It expects that its approval will be sought in all key decisions that UN, IMF, World Bank, NSG etc. make. However, when it comes to taking responsibility as a major economy, it immediately puts up the "I-am-a-poor- third-world-country" flag. Japan on the other hand is exactly the opposite. It willingly takes the responsibility with limited official position. Japan has for years been providing huge funds to the UN and now it does so to IMF, yet it does not have a permanent position in the UN Security council.

China expects India not to rake up history in the border issue. While it itself keeps refering to history when dealing with Japan. China uses Japan's past history to oppose its seat in the UN Sec Council.

As Pakistan how it felt on being shooed away by China. Eventually, who'd help Pakistan....obviously it has to be US and Japan.

jcage

November 14, 2008 2:25 AM

Pakistan got some investment from China and Pakistan economic problem are nothing compared with what India would face if the outsourcing business from Europe and USA come down hard due to the financial problem. India has a huge internal debt and external deficit and +10% inflation so less room for economic stimulus maneuver so India need to start being proactive and help its own economy ASAP. Just a friendly advice!

Optimist

November 14, 2008 7:55 PM

@JCage,

I agree with 'To All'.

This issues mentioned haven't got anything to do with how rich or poor and country is, or how large or small internal debt and external deficit is (BTW US has world's largest debt, yet it is the biggest economy). It is about attitude, and China scores very poorly. I am sure you heard the phrase "you don't have to rich to be generous".

And yes Pakistan got the promise of two nuclear reactors from China, when it went around with a begging bowl to China and now IMF.

Commentary

November 14, 2008 8:07 PM

Interesting discussion between Newbie, Optimist, Jcage and To All.....

Please allow me to summarise.

"WHEN PAKISTAN HAS FRIENDS LIKE CHINA, IT DOES NOT NEED AN ENEMY".

jcage

November 15, 2008 2:04 AM

Sure, Pakistan it still in better shape than Sikkim, Assam and Bhutan. Pakistan can truly decide their future by themselves rather than being dictated by some guy from New Delhi!
Pakistan will survive this one so don't worry to for it!

Hi All

November 15, 2008 7:23 PM

Oh Yes, Pakistan begged around and now has gotten $ 7.6B in alms from the IMF. Its cricket team members have begged around and come to India to play and make their livelihood, because nobody wants to go Pakistan. And the list can go on....professional beggers!.

jcage

November 16, 2008 12:59 PM

Pakistan will have a meeting around Nov 17 with Saudi Arabia, China and other Middle Eastern countries to talk about economic stimulus to Pakistan economy. Therefore, a combine help package from the IMF and its friends, Pakistan will survive this down turn! While India, we will find out how strong is its economy so don't get your panties wet by laughing at other countries woe!

2012

November 18, 2008 8:49 PM

@ Optimist, Newbie and all the other Indians who are bad mouthing China.

Let me tell you losers one thing. Atleast China has a stimulus plan in place to help it combat the effects of the global economic downturn. How effective will be China's stimulus plan will depend on the severity of the downturn as no country is uneffected by it.

Bottomline: China is moving to do something about the problem, while India doesn't even have any stimulus plan yet even though India too is feeling the effects of the global crunch. Latest statistics show that India's over-hyped shine is disappearing.

You Indians should quit the habit of doing nothing other than sitting on your ass and mocking others efforts.

test

November 19, 2008 11:16 AM

so domestic stimulus package til end of 2010. China knows how to invest in itself.

nayak

November 20, 2008 1:32 AM

All the internet Indian internet warrior is a recent phenomenon that appear during the dot.com boom in which a lot of those mook got hired through H-1 visa and let pray the day when the entire Indian economy collapse so we don't have hear those Hindu braggart contaminating the air with their ego and racist behavior!

cextree

November 20, 2008 2:24 AM

@ Liza.

I rather doubt how the money will be spend. The poor are even poorer, and the richer are becoming richer. The US guys hate the Wallstreet bankers, while the Chinese hate the corrupted government officials.

cextree

November 20, 2008 2:25 AM

@ Liza.

I rather doubt how the money will be spend. The poor are even poorer, and the richer are becoming richer. The US guys hate the Wallstreet bankers, while the Chinese hate the corrupted government officials.

nayak

November 21, 2008 7:27 PM


Hindu extremists' reward to kill Christians, as Britain refuses to bar members
Rashtriya Swayam Sewak Sangh (RSS), a Hindu hard line frontal organisation's workers take part in 'Shastra Puja' or 'Weapon Worship' in Bhopal, India

(SANJEEV GUPTA/EPA)

Members of the Rashtriya Swayamsevak Sangh (RSS) party take part in a 'Weapon Worship' ceremony in Bhopal. Britain has refused to bar members of the radical group
Rhys Blakely in Bombay

Extremist Hindu groups offered money, food and alcohol to mobs to kill Christians and destroy their homes, according to Christian aid workers in the eastern state of Orissa.

The allegations follow the British Government’s refusal to prevent members of two radical groups linked to the worst antiChristian violence in India since Partition entering Britain.
http://www.timesonline.co.uk/tol/news/world/asia/article5186703.ece

The US-based head of a Christian organisation that runs several orphanages in Orissa – one of India’s poorest regions – claims that Christian leaders are being targeted by Hindu militants and carry a price on their heads. “The going price to kill a pastor is $250 (£170),” Faiz Rahman, the chairman of Good News India, said.

ellena

November 27, 2008 10:23 AM

The economic stimulus package of about $585 billion dollars is expected to stimulate domestic consumption. It will be spent not only on railways, roads, and infrastructure projects. But also, The Chinese government has taken some measures to boost domestic demand, This includes increasing the monthly minimum subsidy and farmer's income, keeping the unemployment rate low, Improving social security including medical insurance, pensions etc.
The Chinese goverment has also revamped the value added tax, It will only ease the manufactuers's burden and increase their profits. The prices of commodities are still the same. So Consumers are not the beneficiaries of this policy.
Furthermore, According to a report, 80% wealth in China are being hold by 20% of people. It's necessory to raise the individual income tax threshold to ease the burden of medium and low income earners, so as to have a better wealth distribution.
It's very important to improve social security, Although thrift is one of Chinese people's traditions, Largely due of high cost of medical treatment, Chinese people put away about 2/3 of their income just in case of unemployment and unexpected diseases. If China had a complete secruity system, Chinese citizens would be more than willing to spend more, which definitely boost local consumption. it's time to have a medical system reform.
It's good to have $585 billion dollar spent on these projects, The money is from Chinese taxpayers, it's suppose to be spent on them too. At least, the railways need to be enlarged, It's ridiculous that those migarant workers who have been away for a year couldn't get a ticket back to hometown during New year holiday.

Ezequiel V

February 5, 2009 1:18 AM

If you think that US is the only country that needs stimulus package, I'm sorry, but you're wrong. China is also needed stimulus plan to boost their faltering economy. it seems that very country needs it to survive to the economic mood swing. In US, the economic stimulus plan approved by the US house would invest billions of dollars in renovating government buildings for greater energy efficiency. The economic stimulus plan is almost $900 billion; this and that business lost this many billion dollars. Billions of dollars is hard for me to understand. It's easier for me to understand the amount of a payday loan. Do you know how much a billion dollars is? A billion one dollar bills lined out end to end would stretch halfway to the moon. That's one heck of a payday loan we're giving Wall Street.

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desertWind

July 21, 2009 2:15 PM

I pride to be citizen of the world, so I am also hoping that the Hindu's class system of "Royal(lords) and peasant (commoner)will change", so the education level will improve together with the knowledge, virtues and economy.
China had forgotten the past history with Japan. The former Premiere Mr. Deng Xiao Ping , when asked by the Japanese premiere about twenty five years ago." about the return of the northern island back to China." Mr. Dan replied:" Slow down, we wouldn't know how the politics of the world is going to be fifty years from now." Most recently, Mr. Hu said:" We hope Japan will involve in greater part of the affair of the world. We are happy to see the peaceful path Japan takes since the WW2."

Desertwind

July 21, 2009 2:32 PM

Eisenhower put the money in jobs to build up the transnational interstate highway system, thus created many jobs and eliminated the unemployment. May be it is time to find another project like this- Time to start intergallactic highway system; not only that it can employ the best of our graduates, but also put our country back to the leading seat, the vast infra-structures, and the true prospect of developing future energy resources such as H3...etc.

AlexAdvisor

October 15, 2009 7:44 AM

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October 21, 2009 7:54 PM

bendjamin

October 26, 2009 8:25 AM

A person should not live outside his financial means even to better his living status. Our Government will resolve this and work this out or there will be a lot of people suffering that depend upon credit cards and fast cash loans for what they have in their lives. I was raised and taught to pay cash for what you want and save everything you do not have to spend. If more people around the world would realize this we would not be in this situation. The best thing to do is not panic and have faith that it will be alright in all areas of concern.

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Stanley

November 19, 2009 4:01 AM

China is a monster. Look what they do. It is incredable growth for the last several years. Do they sleep at all? I think - no. Workoholics. T to get at all.

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Bloomberg Businessweek’s team of Asia reporters brings you the latest insights on business, politics, technology and culture from some of the world’s biggest and fastest-growing economies.

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