I have warned in this blog on numerous occasions that China has massively underestimated its resilience to a fall in exports and overestimated the domestic economy to take up the slack.
At last the dangers appears to be sinking in. In response the stock market rose 7%. However, questions remain as revealed by the second FT article.
I will review my stock market predictions later this week but I have a feeling that my predictions were pretty close to being spot on.
China authorises ‘massive’ stimulus package [FT]
China announced on Sunday a “massive infrastructure spending programme” as part of a new fiscal stimulus plan aimed at boosting the country’s rapidly slowing economy.
The State Council, China’s cabinet, authorised Rmb4,000bn ($586bn) of investment on infrastructure and social welfare over the next two years, although it did not say how much of the spending would be on new projects not already in the budget.
The government said the spending plan reflected a decision to adopt an “active” fiscal policy to deal with the global financial crisis, while monetary policy would be “moderately active”.
The announcement reflects mounting anxiety in Beijing that China’s economy is cooling much more quickly than was initially expected in the face of weaker international demand and a slowdown in the local property market.
Two recent surveys of manufacturers showed a slump in activity in October, confirming anecdotal evidence that the slowdown has accelerated in recent weeks. Some economists believe that growth, which was nearly 12 per cent last year, could fall to as low as 6 per cent next year without a substantial fiscal stimulus.
Beijing has also been under growing international pressure to take fiscal measures to boost its economy in the hope that continued strong growth can provide some counter-balance to recession in the developed world.
The government has already cut interest rates three times, scrapped quotas for bank lending and unveiled measures to help housebuyers and some exporters. However, economists said those measures had not been enough to overcome growing gloominess among companies and consumers.
According to the official Xinhua news agency, the State Council decided on Friday to “map out more forceful measures to expand domestic demand”, which would include “massive” infrastructure spending.
The investments will focus on low-income housing, water, electricity, disaster relief and transport, with railways expected to see a big increase. Spending in the fourth quarter of this year would be boosted by Rmb120bn beyond what was planned.
The government said it would introduce a long-awaited reform of value added tax which would cut costs for Chinese companies by Rmb120bn, Xinhua said.
In China’s 2006-10 Five Year Plan, the government said it would spend Rmb5,100bn on infrastructure projects.
Article number 2:
Questions raised over fiscal package [FT]
China’s new fiscal stimulus package on Monday animated financial markets desperate for any signs of good economic news around a world confronting a significant slowdown. Yet the package’s announcement has also left many questions unanswered.