China: Massive fiscal stimulus package an-nounced – May help to stabilise financial markets in short term.

On Sunday, the Chinese government announced a major new stimulus package estimated at CNY4 trillion (about USD570bn), to be spent over the next two years. The total size of the stimulus package is about 14.5% of GDP (based on 2008 estimates), or roughly 7% of GDP in spending per year.

The main elements in the stimulus package are:

  1. Construction of more affordable low-rent housing.
  2. Increasing investment in rural infrastructure (mainly road and power grids).
  3. Boosting investment in transportation (railway, airports and upgrade of urban power grids).
  4. Increase spending on healthcare and education.
  5. Improve environmental protection by investing in sewage, rubbish treatment and energy conser-vation.
  6. Extending reform in VAT reform to all industries (cut corporate taxation by CNY120bn).
  7. Income support by increasing agricultural subsidies and subsidies to low income urbane resi-dents.

We should be careful not to get too excited by the huge headline numbers. First, the stimulus package is not all “new” spending measures. For example,

  • The numbers apparently include the spending on recon-struction in the areas hit by the earthquake in early May.
  • Many of the measures included in the stimulus package have already been announced (railway investments and rural infrastructure invest-ments). Hence, to a large degree the stimulus package summarises the government’s recent initiatives and the numbers, to some degree, are boosted to maximise impact on the financial markets and not least to improve China’s standing at the G20 meeting starting in Washington later this week.

The main boost to growth from the stimulus package will have to come from housing and infrastructure investments. This raises the question about implementation. How fast will you actually be able to increase infrastructure investment substantially? Planning will naturally take time and for that reason there could be a considerable time lag from making the investment decision to actually starting construction.

Hence, the stimulus package is probably not going to make much difference in the short run. Q4 08 and Q1 09 will remain very challenging with GDP growth probably dipping below 8% y/y. The best we can hope for in the short run is that the stimulus package may help to stabilise financial markets.

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