International | Nov 25 2008
By Chris Shaw
As the magnitude of the current financial crisis grows it is forcing policymakers in both developed and emerging nations to introduce even larger programs and greater measures in attempts to offset the impact. China is no exception with its recently announced super stimulus plan worth around US$586 billion, which reflects the realisation of authorities the economy is slowing faster than both expected and desired.
ANZ Banking Group chief economist for Asia, Paul Gruenwald, points out the package represents around 15% of China’s GDP and around 30% of its current investment and is designed to not only boost demand and therefore growth, but also confidence in the economy broadly.
The plan covers a two-year period. One quarter of spending is to be funded by the federal government and the rest by local governments and the private sector. As Gruenwald notes, while headline GDP growth remains solid at around 9%, there are signs growth in key industries such as automobiles and steel are deteriorating if not stalling. This could push growth below what the bank sees as a comfortable level of around 8%.
The good news, in Gruenwald’s view, is the slowdown is not a broad one and appears to be somewhat industry specific. Consumption is holding up reasonably well and real retail sales growth remains in the high teens in year-on-year terms. Export growth is also holding well given the state of the global economy and is helped by foreign demand remaining reasonably strong even as exports from other key economies in the region have fallen to flat or negative levels.
For the stimulus package to deliver the most benefits it needs to be well designed in terms of targeting the right sector of the economy and it must be able to be implemented in a reasonable time. In the bank’s view, the Chinese plan fits the bill in both instances.
Gruenwald notes the package is aimed at industries where recent activity levels have been weakest, such as public housing and infrastructure. This makes sense, as a focus on investment appears more beneficial given consumption has held up well to date.
Implementation should also not be an issue, as a number of the projects have previously been identified in the latest five-year plan for the economy. This should also shorten the time lag for some of these projects. Financing the projects is also unlikely to be a problem, as Gruenwald points out the government has deposits equal to 17% of GDP at the commercial banks, which can be draw down as required.
Given the government has used the strong growth of recent years to improve its public debt to GDP ratio to around 3.4%, Gruenwald notes it provides room to ramp up spending without creating any significant problems with respect to affordability.
There are risks, of course, and one of the major ones in Gruenwald’s view is an inability to implement the projects in a timely manner. By not proceeding fast enough there is scope for growth to fall below desired levels. Low quality spending is also a possible issue, as it would limit the positive impact of the money being spent while also potentially increasing the scope for non-performing loans or low value assets.
One point Gruenwald makes is the size of the package appears to be well above what is required, as a package worth around 5% of GDP should be enough on his numbers to keep GDP growth above the key 8% level. Part of this reflects the decision to look for political benefits from the package, in his view, as by moving so aggressively, Chinese policymakers are showing they can work with others in terms of supporting the global economy. It also sees China enhance its position as the growth engine for the Asian region generally.
Factoring in the package sees Gruenwald retain his forecast for Chinese GDP growth of 8.0% in 2009. His estimate would have been a few percentage points below this if the package had not been announced.
