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

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

Boosting consumption

Central to the stimulus package is its extension of well-planned railway expansion plans, which had been put on hold due to fears that the economy was in danger of overheating. The centerpiece of this, meanwhile, is the new high-speed passenger line stretching through central cities to Guangzhou.

"The main purpose of this dedicated passenger line will be consumption -- tourism and leisure," says David Dollar, the World Bank's chief China economist.

"It is the same for the accelerated investments in water and sanitation and urban transport. These investments will raise the quality of life and not have much direct effect on the country's production capacity. Also, some of the investments will be in housing, schools and health facilities. So it is not fair to portray the investment program as primarily aimed at building up the industrial and export capacity of the country."

Following speculation as to the real size of the fiscal stimulus package, central government officials held a joint press conference on November 14, clarifying that 1.18 trillion yuan will be funded directly by the central government over the two years.

However, Morgan Stanley analysts note that central government officials also hinted that some local governments may be permitted for the first time to run deficits to be financed by debt issuance, subject to approval from the central government.

In their view, this means it is safe to say that local governments can be expected to add fiscal stimulus at least as large as that to be provided by the central government.

Moreover, the policy shift is likely to spur further spending by companies. The analysts note that some State-owned enterprises may respond to the call from policy makers by boosting investment.

To assess the final macroeconomic impact of the stimulus package, economists employ a measure called a "fiscal multiplier," which is a measure of the degree to which the government's fiscal intervention stimulates an increase in national income and consumption.

Academic research suggests that in China, this is roughly equal to a multiple of 1-1.5 the size of the original stimulus. On this basis, taking into account only the central government-derived stimulus, Morgan Stanley estimates that the package would contribute around 2 to 3 percentage points to GDP growth. Once the combined effect of central and local government stimuli, plus newly mobilized non-government capital, are factored in, the effect could be greater.

Meanwhile, CMR's Rein highlights hopeful signs on consumption. While those aged over 40 have a savings rate of 50 percent to 60 percent, he places great confidence in younger Chinese consumers.

A CMR survey of individual consumers between the ages of 22 and 30 in ten cities across China suggests that people in this bracket have zero savings rates, pointing to a sharp generational difference.

Based on his observations, he believes that the country's savings rate will fall to 20 percent within 20 years. Moreover, China's young are not heavily exposed to losses on China's tempestuous stock markets. Rein is therefore extremely bullish on the consumer front.

Recent high-profile government initiatives may also have the potential to support a shift to a more consumption-led economy, suggests Markus Boehm, CEO of SIG Combibloc in Suzhou.

Though painful for many companies, improvements in protection for workers under the recent labor law will lead to higher salaries for Chinese employees, hence to increase spending. Chinese consumers will need more financial instruments in order to convert their savings into consumption, though, he adds.

The approval in October of measures that are expected to legalize the transfer of rural land use rights also points the way to greater consumer demand in the agricultural sector, he says.

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