November 17th, 2008 | Caijing Magazine Macro Review: Stimulus Plan Not Good Enough
Neglecting the need to strengthen consumption leaves a big need unaddressed.
By staff reporter Zhang Hong
China won some applause by announcing a bold stimulus package of more than 4 trillion yuan. As the leadership has more than once uttered, “the greatest contribution China could make against the global crisis” is to maintain its growth strength. Few doubt China’s economy can grow by more than 8 percent next year thanks to the stimulus, yet worries have arisen that could this plan miss the point of what is most badly needed.
The government made clear last Friday that among the 4 trillion yuan supposed to be invested in two years, the central government will provide 1.18 trillion of funding, with the rest financed by local governments and the private sector. Arguably, those sectors addressed in the stimulus package would get an upper-hand for future growth.
Reading through the 10-point stimulus plan, one can easily tell that a major portion is aimed at gearing up investment. Seven points out of 10 directly involve investment, including construction of rural infrastructure and transport networks, environment improvement, innovation-oriented restructuring, reconstruction in the earthquake area, value-added tax reform favoring more investment in fixed capital, and financial facilities.
Only three points are intended to stimulate consumption, namely social housing development, med-care, education, cultural industries, and income-increasing initiatives. Social housing development has no less to do with investment, it’s worth noting.
An easily-drawn conclusion is that heavy industries will benefit from the stimulus package most. For example, steel and cement manufacturers and oil refiners could see more demands as a result of more construction of railways and housing.
Such huge investments will also bring business to the finance sector. Currently with a fairly low loan-to-deposit ratio – 65 percent – Chinese banks have more than enough cash for lending. In addition, Chinese banks have an ensured margin as long as the interest-rate control is still in place.
Insurance companies might also gain, as infrastructure construction has been a major investing object of Chinese insurers.
To sum up, to a large extent, state-owned enterprises (SOEs) will be the major beneficiary, as heavy industries and the finance sector are all dominated by SOEs. Light industries where private companies take up more space, on the contrary, might see little benefit from the package. They could be squeezed further if banks become more reluctant to lend to them in favor of government-chosen projects.
Chinese exporters, those hit hardest by the global recession, mostly engage in light manufacture, thus seem to have fallen on the less favorable side. With across-the-board recession in the advanced economies in the coming year, as the International Monetary Fund forecasts, Chinese exporters have little hope in receiving as many oversea orders as needed.
They might also find it as difficult to market domestically, with Chinese consumers unlikely to spend more. In October, retail sales on foods, clothing and other nondurable goods have grown in a much slower pace than a year ago, signaling that households are cutting back on expenditure.
By putting only minor effort into strengthening consumption, the government’s stimulus plan could at best be partially successful. If the exporters can not transform themselves into domestic suppliers, a prospect believed to be the best way out, there might be more shutdowns in this labor-intensive sector, meaning more unemployment and in turn, even weaker purchasing power.
Many things could be done for the government to beef up consumption, as listed in the prescription by economists. Price caps for agricultural products need to be lifted so that farmers can earn more. This would have the added advantage of giving millions of rural workers a nice option of resuming agriculture if they could no longer find a job in export factories. Income taxes need to be lowered so that households can keep more of what they earn in hand. For example, the government could raise the level of personal income tax exemption, and/or it could deduct mortgage interest taxes.