Cover story, issue no. 382, August 25, 2008
Translated by Zuo Maohong
Original article: [Chinese]
A market report stating that high-level Chinese officials were considering a 200 to 400-billion-yuan economic stimulus package has led to temporary surges in stock prices and debate amongst economists.
Despite no forthcoming official confirmation since the report was released on August 19 by Frank Gong, managing director of J.P. Morgan Chase & Co. in Hong Kong, the EO learned from several government sources that an expansionary formula was under study in case the economic growth slowed further.
The proposed formula might include 150 billion yuan in tax incentives and 220 billion yuan of additional expenditures, mainly to be spent on public facilities and services.
Seeking Confirmation
An official from the Ministry of Finance (MOF) told the EO he had heard that someone had proposed such a plan, but whether the proposal could be carried out remained a question.
He added it depended on the performance of the macro economy—if the economy slowed to a level that called for government stimulation, this proposal would be feasible either in terms of procedural clearance or funding sources.
According to an official from the Office of the Central Financial Work Leading Group, the office was actually considering a plan to relax macro controls a little and prevent possible economic decline. "Though some data had been leaked through informal channels, it didn't hinder the top officials from studying the plan," said this source.
If approved by the Office, the plan would still need further study by the MOF and approval from the State Council. Policies such as tax reductions might also be deliberated on by the National People's Congress.
The plan would likely involve some 370 billion yuan, including 150 billion yuan of tax reductions and 220 billion yuan of additional expenditures.
The EO learned that the tax reduction plan may include a higher threshold for individual income taxes, further export tax rebates, and preferential tax policies for small and medium enterprises.
Additional spending would cover 45 billion yuan for social security, 46 billion yuan for agriculture, 38 billifor yuan for technology development and education, 35 billion for yuan for public facilities, eight billion yuan for subsidies for state-owned companies, and 28 billion for yuan for energy and other major imports.
Funding might be a problem if this package were to be implemented within the year. According to the above-mentioned source from the MOF, funds presently available within this year's budget included the 35-billion-yuan contingency fund, which had nearly been used for the snow storm and the Sichuan earthquake earlier this year.
The other source would be the stabilization fund, which still had 43.2 billion untouched. If these funds ran out, they would have to resort to the budget surplus, the source added.
In the first half of 2008, fiscal revenue totaled 3.4 trillion yuan, contributing a surplus of over one trillion yuan. Despite this, the MOF was still concerned about the whole year's performance.
According to a notice issued on August 22 by the MOF, the country's tax revenues in July grew by 13.8% year on year, but the growth rate was down by 19.3% compared to last year's.
For the MOF, there wasn't much room for further tax reductions given the recent favorable adjustment on enterprise income taxes, export rebates on certain textile commodities, individual income taxes, and many taxes in earth-stricken areas.
A Policy Shift?
Previously, most market observers thought a major part of the package would be used to stimulate investment; but it appeared to be mainly dedicated to social securities, technology, education and agriculture. Economist Li Wei at Standard Chartered believed that this kind of stimulus should not be defined as a policy shift towards expansionism.
His explanation was that the 45-billion-yuan spending on social securities would not enter the market directly and thus would not help to stimulate consumption; and that the 35-billion-yuan for public facilities would only be a drop in the bucket.
Compared with the whole of China's GDP, 370 billion yuan only made up a small portion—1.77%. Therefore, Li believed the formula was more a long-term, sustainable policy than a significant, temporary measure. And he suspected this package might be an arrangement of budget surplus rather than an economic stimulation.
However, Liang Youcai, chief economist at China Economic Information Network, believed the government should adopt more active financial policies to guarantee economic growth. Despite previous stress on stability and moderation, it was time to shift to more active measures to stimulate the economy, he said.
Based on the meetings he had attended and all the official statements he had heard of in the past half year, he was optimistic that the formula would most probably be approved.
"The fourth quarter GDP is very likely to drop below 9%," Liang said, adding this was the greatest concern of the State Council at present. Therefore, he believed a moderately expansionary policy suited the situation.
The last time the Chinese government adopted active fiscal policies was 1998, when the economy recorded sharp decline due to the 1997 Asian financial crisis. To prevent further drops, the government had then increased investment in fixed assets greatly from the previously planned 10% to 14.8%.
Too Early for Stimulation?
Economists at Standard Chartered held that it was too early to introduce a stimulus package. According to their survey, companies were willing to invest, but had trouble with financing. If credit were loosened a bit, their problems would be solved. This, Li said, would have the same effect as a stimulus package.
According to Standard Chartered, the Chinese economy might slow down further after 2009, at which point the government should take action to stimulate the economy. At present, however, both companies and individuals were still willing to invest and spend, and the government should not intervene.
How soon would it take effect if such plan was implemented? By Li's estimate, there would be two rounds of reactions—the first would happen once the news was released, and the second would come in the following two quarters, when policies were gradually carried out.
Liang noted that there would be a time lag after a new policy was adopted, so it would be too late if countermeasures were issued after the economy started slipping.
Yang Zhiyong at the Institute of Finance and Trade Economics under the Chinese Academy of Social Sciences noted that financial polices usually took effect quickly, but studying them took a long time.
He said when the Asian financial crisis broke out in July 1997, China only introduced active policies one year later. The same was true this time—officials had been talking about expansionary policies since the end of last year, but concrete action had yet to emerge.
