China Acts with a Huge Bailout
|Our Correspondent||Nov 10, 2008|
Increasingly concerned about its slowing economy, China’s State Council Sunday got around to doing what been expected since the second quarter of the year – creating a gigantic Rmb4 trillion (US$586 billion) stimulus package to prop up investment and consumer confidence and keep retail spending from collapsing altogether.
As evidence of its concern, Beijing abruptly called back China's Finance Minister, Xie Xuren, from the 15th annual Asia-Pacific Economic Cooperation conference in Peru even before the meeting began on November 6, apparently on orders to help resolve problems at home.
The package does send China into the G-20 meeting of the world’s economic leaders in Washington, DC on November 15 well ahead of other countries. The European Union and the United States have been flailing for the past several months in their attempts to stave off economic disaster. The US has special problems, with the lame-duck administration of President George W. Bush, already enervated by eight years in power, getting ready to leave office, and the new administration of President-elect Barack Obama not ready to take power until the inauguration on January 20.
All indications so far are that China intends to take care of itself first despite increasingly desperate requests for help from Washington, DC. China is still feeling its way into a global role and it appears that its main intention is to support efforts to reverse the global crisis by ensuring that its own growth, expected to drift down to 8 to 8.5 percent in 2009, doesn’t collapse. The economic situation almost certainly puts paid to any desire on the part of the leadership to allow the currency to float upwards, even despite threats from the west, including from Obama, to name China a currency manipulator.
It is also questionable, however, how the country can pour that amount of money into its economy that quickly. With an annual economy of about US$3.54 trillion, the plan calls for spending 7 percent of gross domestic product each year by 2010. Although plans have been on the books for quite some time for a lot of the infrastructure spending, pushing it through the country’s notoriously corrupt and inefficient bureaucracy could raise serious problems.
Until fairly recently, Beijing’s confidence in the world’s fastest-growing economy was complete. Gross domestic product had been steadily increasing at a near 10-percent clip for the better part of a decade. The country, and particularly Guangdong, had become the workshop to the world.
But then the air inevitably started to leak out. The first concern was auto sales, which began to plummet at the beginning at 2008 before picking up in September. By July, the National Development and Reform Commission reported that unsold car inventories had risen 50 percent from the beginning of the year to a four-year high. Rising inventories of consumer products and slowing growth began to suggest a self-reinforcing cycle of gloom for the economy and financial sector. Industrial output fell to 11.4 percent in September, steel output went negative, and cement growth was only 0.8 percent annually. Both residential and commercial property sales and the stock markets plummeted.
Strong points remain. Retail sales growth hit 23.2 percent year-on-year in September, exports remained strong at 21.5 percent, imports were up to 21.3 percent and China continued to maintain a healthy trade surplus of nearly US$30billion for the month.
Nonetheless, figures that for most countries would spell torrid growth spell serious alarm for China’s leaders in a country where incomes average US$605 per year for the 800 million rural dwellers. Beijing remains extremely concerned about maintaining stability and delivered up a larger-than-expected package to seek to prop up confidence. Unlike almost any other country, China has the money to expend from its whopping foreign currency reserves
“We believe it highlights the government’s heightened concerns about the rapidly worsening economic environment in recent weeks and their willingness to take necessary measures to prevent the economy from slowing significantly in the coming quarters. Alongside recent shifts in monetary policy—and the recent moves to ease policy in other parts of the world—this is clearly another significant step towards combating global economic risks,” wrote Goldman Sachs economist Yu Song in an analysis of the package.
The 10-part US$586 billion package includes money for affordable housing, water, power grid, rural roads and irrigation systems for rural dwellers, new rail passenger lines into western China, improving its expressways, building airports in western China, major spending for urban sewage, solid waste, and water pollution. Some 312 million people in rural areas have no access to safe drinking water, according to the United Nations.
The government package also directs spending to local medical systems, which virtually collapsed in the transition from a communist to capitalist economy. By 2007, government spending had fallen to 15 percent of the country’s annual budget, well below even the 21 percent the United States spends on Medicare and Medicaid in a system that most health care experts describe as glaringly inadequate for an industrialized country.
More spending is to be directed to the rebuilding of the country’s devastated earthquake areas, where local outrage has grown over substandard school construction that crushed thousands of students. Income subsidies are to be granted to raise grain purchase prices from peasants and provide direct subsidies as well. Both urban and rural social security and welfare are to be improved. Consumer credit on the part of China’s state-owned banks is also to be encouraged and value added tax reform is designed to reduce enterprise burdens by Rmb120 billion (US$17.58 billion).
Will it all be enough? Probably not. Most analysts believe the global slowdown is so marked that all China can do is ameliorate the slowdown, although amping up the China economy can be expected to have a positive effect on regional economies such as Japan, Korea and Taiwan which export into the mainland. Otherwise, external events are beyond its control. Even today, despite the fast growth of the consumer economy, China remains an export-oriented country and the Pearl River Delta – Hong Kong’s hinterland – is estimated to lose as many as 2.5 million jobs as toy and textile manufacturers and others close shop.
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