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

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

Stimulating reaction

Initial reactions to the central government policy among businessmen in China, markets and international leaders have been generally favorable.

Robert Zoellick, president of the World Bank, which along with the IMF had advocated for a fiscal stimulus package, described himself as "delighted" by the move. "China is well positioned, given its current account surplus and budget position, to have fiscal expansion," he commented.

On top of its $1.9 trillion in foreign reserves, the country enjoys low levels of domestic debt and has maintained a fiscal surplus in recent years, he noted.

Despite recently downgrading their Chinese growth forecast for 2009 from 8.2 percent to 7.5 percent, analysts at Morgan Stanley meanwhile praised the Chinese authorities' "unprecedented efforts to boost confidence and growth."

The policy moves send a message to the markets that the authorities will do all that is necessary to achieve their desired growth rate for 2009, which they are targeting at around 8 percent to 9 percent.

Wang Qing, Chief Economist of Morgan Stanley China, and colleagues outlined the stakes in a November 16 research note: "Without this stimulus package, the economy would likely head toward a hard landing (e.g., 5 percent) in 2009. With this fiscal package, the risk of a hard landing scenario (i.e., below 7 percent growth) has diminished substantially, in our view.... If this current policy package were to prove insufficient, we have no doubt it will be augmented."

In Morgan Stanley's view, the economy is likely to continue to decelerate over the next three quarters, before bottoming out by mid-year 2009, and staging a modest recovery in the second half of 2009 as external demand picks up and the pro-growth policy starts to kick in.

"The Chinese government is proactively and constructively addressing the implications of the global downturn on the domestic economy, turning an external economic threat into an opportunity to strengthen the domestic economy," says Wharton management professor Raphael "Raffi" Amit. "A very wise move in my view."

This said, some analysts have questioned certain aspects of the plan.

Shaun Rein, managing director of Shanghai-based China Market Research Group (CMR), notes the package's concentration on large, public enterprises and public investment at the expense of smaller companies, which he believes will be important employers and contributors to growth in the future. He would like to see more done to help China's entrepreneurs, he adds.

Perhaps the most common criticism of the plan stems from its emphasis on infrastructure projects. "The current stimulus plan focuses very heavily on infrastructure projects, which are obviously wise long-term investments," notes Zhang. He and others would like to see more spending on stimulating consumption.

China has a high savings rate, at approximately 60 percent of GDP, which correlates to low domestic consumption. "Consumption only accounts for about 40 percent of China's GDP, while in the US, for instance, the comparable number is more like 60 percent to 70 percent," says Zhang. "Thus, there is quite a bit of room for stimulating domestic consumption."

Franklin Allen, a finance professor at Wharton, notes that in a global recession workers may be fearful of spending in case they lose their jobs, making them reluctant to spend. At a more basic level, however, observers chalk up Chinese consumers' high propensity to save to the necessity of putting money away for health and education expenses given the relatively underdeveloped nature of China's welfare net.

"Some spending on beefing up social safety nets will go a long way to reduce precautionary savings and stimulate consumption demand from average households," says Zhang.

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