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.