China to spend 4 trillion RMB on Economy ("Kitty")

Posted by Andrew at 11/10/2008 4:47 AM
Categories: Economics, China
Here's the title in the Shanghai Daily (English): China unveils massive kitty for fiscal stability
(LAUGHING!!!)

CHINA said yesterday it would loosen credit conditions, cut taxes and embark on the massive infrastructure spending program in a wide-ranging effort to offset adverse global economic conditions by boosting domestic demand.

A stimulus package estimated at 4 trillion yuan (US$586 billion) will be spent over the next two years.

The kitty will be used to finance programs in 10 major areas: low-income housing, rural infrastructure, water, electricity, transportation, the environment, technological innovation and rebuilding from several disasters, most notably the May 12 earthquake in Sichuan Province.

It comes amid indications that economic growth, exports and various industries are slowing in China.

Policies include a comprehensive reform in value-added taxes, which would cut industry costs by 120 billion yuan.

China has had to do quite a dance (in Monetary Policy) as the economy was growing at over 11% and inflation was at 8.7% in February.  Expectations are for inflation below 4% and now growth will be much lower than the 9% of the third quarter.  The government has decided time to act is now, before the affect of U.S. cutbacks in Christmas spending are fully felt!!

Now some analysis from Bloomberg.com:

China pledged a 4 trillion yuan ($586 billion) stimulus plan to prop up growth in the fourth-largest economy as the world heads toward a recession.

The funds, equivalent to almost a fifth of China's gross domestic product last year, will be used by the end of 2010, the Beijing-based State Council said yesterday on its web site.

China is taking steps to bolster its economy, the biggest contributor to global expansion, less than a week before President Hu Jintao goes to Washington for talks with world leaders on ways to revive growth.

China accounted for 27 percent of global economic growth last year, more than any other nation, according to IMF estimates. Central bank Governor Zhou Xiaochuan said Nov. 8 that boosting spending at home is the best way China can help avert a prolonged world recession.

The stimulus package, of which 100 billion yuan is earmarked for this quarter, will go toward low-rent housing, infrastructure in rural areas, as well as roads, railways and airports, it said.

The government will allow tax deductions for purchases of fixed assets such as machinery to stimulate investment, a move that will reduce companies' costs by an estimated 120 billion yuan.

“China is well positioned during the recession to boost infrastructure, modernize aging industrial assets and also invest in raw materials production abroad, including energy,'' said Ariel Cohen, a senior fellow at the Heritage Foundation in Washington.

A 20% fiscal stimulus in China the fourth largest world economy, while in the largest economy McClatchy.com asks:

Can a $100 billion stimulus save a $14 trillion economy?


The $100 billion is the amount that President Elect Obama has asked Congress and the President to pass now, before the end of the lame-duck Congress.  Most of the reports I read is that the U.S. will have to wait until Barak is President, but we shall see.

From the New York Times:

With many economists in China now projecting that growth in the fourth quarter of this year could be as low as 5.8 percent, and worries that China’s economic miracle could be walloped by the global financial crisis, Beijing is moving aggressively.

While it is unclear how much of the stimulus money is additional government spending, on top of what the government normally earmarks for its infrastructure projects, the government made clear it was aimed at propelling growth for the next two and a quarter years.

Analysts were expecting China to announce a big stimulus package but say they were surprised at the size of it.

“That is much more aggressive than I expected,” said Frank Gong, a Hong Kong based economist at J.P. Morgan. “That’s a lot of money to spend.”

So we shall see what happens during the next few months as I will teach three classes in Financial Markets and Institutions!!!

 

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