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Plan worth 7% of China’s GDP

SHANGHAI: China’s announcement of the stimulus plan on Sunday is an effort to revive a slumping domestic market amid concerns that the economy has been worse affected by the global financial crisis than previously expected.

Some analysts have been surprised by the size of the package. The amount is roughly 7 per cent of the country’s GDP, and in comparison exceeds the $700-billion U.S. bailout package announced recently, which is less than 5 per cent of America’s GDP. But the actual amount of the stimulus is unclear, as many of the measures had been previously announced.

“The 4 trillion yuan amount looks very impressive, but the government has not specified what the baseline spending will be,” said Tom Miller, the managing editor of the China Economic Quarterly, a Beijing-based economics research think-tank.

“The government has already planned to increase spending by 3.2 trillion yuan next year, so the actual stimulus is probably around 800 billion yuan. It is also unclear how much the government will spend in the first year, and how much extra spending this means,” he added.

Mr. Miller said the possible short-term impact on the real economy would be hard to gauge until further details emerged on how the plan would work. “That said, it is still a large enough amount for the government to signal to the domestic market that it is committed to maintaining growth and to ensure it does not fall below 8 per cent,” he added.

For the domestic market, the signal is much-needed. In recent months, the Chinese economy has been grappling with a slump in the property market, a slowdown in investments and sharply falling exports because of the financial crisis. Economic growth is expected to slow to 9.5 per cent this year, down from 12 per cent last year, and further slump to 8.5 per cent next year.

“We have seen anecdotally that things are beginning to slow down and deteriorating more rapidly than expected,” said Mr. Miller, adding: “The Chinese government had not expected the economy to drop off so quickly. Only six months ago, the government was worried about overheating in the economy.”

Ming Lu, professor of economics at Shanghai’s Fudan University, said while he was not surprised by the size of the stimulus, he feared it “may have come too late.” He said most of the measures would not likely bring relief in the short-run.

“The reform measures in the tax systems and raising the limits on the credit scale will bring some relief,” said Mr. Ming, adding: “But these will not make much of a difference to unemployment or people’s incomes. The Chinese financial market is distorted, and banks lend more to large companies and state-owned enterprises. What is important is that the government finds a balance between economic growth and social harmony.”

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