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China's stimulus package: Will it work, and what's next?

(chinadaily.com.cn)
Updated: 2008-11-26 10:28

Initially, the impact of the growing financial crisis on China was muted: China's banks had only minimal exposure to subprime losses.

However, as the financial meltdown continued to unfold, US consumers' demand for Chinese exports slumped, and it became apparent that any hopes that China would be able to decouple from the slowing global economy were in vain.

In the first three quarters, China's growth rate slowed to 9.9% -- the first time it has slipped into single digits since 2003.

"Given that net exports account for about 20 percent of China's GDP, and that exports plus imports are as much as 70 percent of GDP, China is clearly not immune to the adverse impact of the current global financial crisis," says Wharton marketing professor John Zhang. "The slowdown in the Chinese economy partially reflects this impact."

Manufacturers in China's export sector, already under pressure from the yuan's appreciation, rising costs and stricter enforcement of safety standards, have taken a heavy blow. Industries such as textiles, shoes and toys have been prone to widespread factory closures.

The International Monetary Fund (IMF) now predicts that Chinese output will fall from 11.9 percent last year to 9.7 percent for 2008, and drop further to 8.5 percent in 2009.

Special coverage: Management Related readings:  China puts stimulus package under close scrutiny  WB: China's GDP to slow to 7.5% in 2009  Economist: Stimulus package better than buffer fund  OECD hails stimulus package  China planner offers details on 4 trillion yuan stimulus package

In response, on the evening of November 9, China's government unveiled a massive stimulus package. Officials gave the headline figure as  4 trillion yuan ($586 billion), to be spent over the next two years -- exceeding even the size of China's robust response to the 1997 Asian financial crisis. This marks the first time in almost a decade that China has officially adopted a "proactive" fiscal policy.

The plan will benefit areas including transport and other infrastructure projects, healthcare, education, low-income housing, environmental protection and schemes to promote technological innovation.

Credit policies will also be relaxed, and value-added tax revamped with savings for industry of 120 billion yuan, according to government estimates.

But will it work, and what is the outlook for the Chinese economy? Though some would like to see more done to encourage domestic consumption, for instance, or to support small businesses, reception has been broadly positive.

Some early analysis suggests that the stimulus package could contribute in excess of 2 percent or 3 percent to growth, fending off any risk of a hard landing.

Moreover, experts pointed to many signs of resilience in the Chinese economy, and stressed that the global crisis in fact represents an opportunity for savvy Chinese companies to shop abroad for useful acquisitions.

Amid the pressure of a global slowdown, China will have to do something concrete to shift its growth engine from exports to consumption, which it has attempted to do for many years.

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