The 2.7% year-on-year increase in consumer prices in February takes the monthly inflation rate perilously close to the 3% ceiling that Prime Minister Wen Jiabao set in his National People’s Congress speech. It is both a sharp rise from January’s figure and much higher than expected, even allowing for the seasonal New Year’s effect. Allied to similarly larger than expected jumps in the monthly industrial production and export numbers, it provides a ready excuse for the central bank to raise interest rates to dampen the rate of GDP growth, not that it takes much prompting. Higher rates could cause a bubble-inflating inflow of hot money, which makes this Bystander wonder if there might be some coordinated action coming among the world’s leading central banks to tighten monetary policy and start the exit from stimuli programs.
Tag Archives: stimulus package
More signs of economic spring–or at least the ending of winter– and that last November’s 4 trillion yuan stimulus package is having some effect. The Purchasing Managers Index, a benchmark of manufacturing activity, rose for the third consecutive month in February, though at 49 it is still below the 50 score that marks the difference between contraction and expansion. But it is well above the 38.8 recorded in November and new orders rose for the first time in five months.
Prime Minister Wen Jiabao is widely expected to announce a top-up to the stimulus package when he addresses the National People’s Congress. That top-up may well amount to more than the original package, according to some private economists, though we’ll have to read the small print carefully to see how much is genuine new money, how much is repackaging of old and how much is government-sponsorship of infrastructure projects that will need private or provincial money to break ground. That speaks to the reality that while short term stimulus to the domestic economy can help its slowdown bottom out, whether the 8% target expansion rate for the economy can be hit for the year still depends on recoveries in the markets for China’s exports.
Another of the myriad small steps being taken to keep the economy’s growth rate from falling below the magical 8% mark: small- and medium sized banks are being given more room to make loans to help finance the 4 trillion yuan stimulus package.
The banking regulator singled out farmers, small businesses and sound businesses facing temporary financial difficulties as customers banks should particularly favor. To that end it is relaxing the restriction on small- and mid-sized banks that limits their loan book to 75% of their deposits. With Beijing stumping up only 30% of the 4 trillion yuan itself, it needs to tease out the rest wherever it can.
Does China need a pre-stimulus-package stimulus package? The notion is gaining ground among economists who think that the 4 trillion yuan boost announced in November will take too long to kick in, given the unexpectedly rapid slowdown in the economy. That is focused on infrastructure spending, by definition a longer term boost to the economy, even if officials have a list of local shovel-ready projects to get underway.
In the short term, it is being argued, tax cuts and other measures to boost consumption and help the poor may be what is needed. There is enough whispering about this being discussed in policy-making circles to suggest a number of measures to that effect, such as raising the income tax threshold and issuing shopping coupons as Japan and Taiwan have done, will be announced in the New Year.
The muddied details of China’s 4 trillion yuan stimulus measures announced earlier this month became no clearer with reports by state broadcaster CCTV that projects planned by provincial governments will add 10 trillion yuan to the pot. Among stimulus measures announced in the past week, CCTV said, were 3 trillion yuan to be spent by Yunnan and 2.3 trillion by Guangdong, the money earmarked for infrastructure.
As with central government’s proposed spending plans, it is difficult to distinguish between already budgeted and new monies, and there is little detail on specific new projects. Much of this 10 trillion yuan may be for wish-list projects, see below, that will never see the light of day. Throwing around big headline numbers seems to be part of a propaganda drive to encourage domestic consumption and bolster confidence as economic growth slows.
Another report on CCTV may throw some light on the big numbers being thrown around by the provinces. The broadcaster interviewed Qiu Yunyang, chief of the Development and Reform Bureau of Hubei’s Zaoyang City, about Beijing’s plan to spend 100 billion yuan of its stimulus package in the fourth quarter.
“That means an upcoming investment boom. but it’s not easy to secure central finance. Only those who have a good reserve of projects will have a better chance,” Qiu said.
Qiu said he and his colleagues have been putting in extra hours to find a long list of suitable projects to get a slice of the newly available pie. They’ve already found a 100. CCTV goes on to list province after province where officials are doing exactly the same. Doesn’t take long to get to 10 trillion yuan that way, even if much of it is pie-in-the-sky.
Details of the sources and spending of China’s 4 trillion yuan ($586 billion) stimulus package announced a week ago are starting to dribble out.
Central government will be financing at least a third of it directly. The rest will come from provincial and local administrations, and from state-owned banks and companies. As we noted before, about a quarter of the total is accounted for by natural disaster reconstruction spending already budgeted.
Fifty new airports and improvements to 90 others at a cost of 450 billion yuan over the next two years were announced on the Civil Aviation Administration’s web site today, typical of the ambitious and probably unrealistic plans now being rushed forward. As with the plan overall, it is unclear how much of this was already planned spending being brought forward and how much new money. That makes it difficult to estimate the likely economic impact of the spending.
The National Development and Reform Commission says 100 billion yuan will be spent in the fourth quarter of this year, split 34% on rural income support, 25% road, rail and airport construction, 13% social services, 12% energy-efficiency and environmental projects, 10% public housing and 6% on R&D.
The leadership has been signaling for weeks that a massive stimulus package was coming and today Xinhua announced that 4 trillion yuan of spending, tax cuts and credit easing had been approved by the State Council on Wednesday.
A stimulus package estimated at 4 trillion yuan (about 570 billion U.S. dollars) will be spent over the next two years to finance programs in 10 major areas, such as low-income housing, rural infrastructure, water, electricity, transportation, the environment, technological innovation and rebuilding from several disasters, most notably the May 12 earthquake.
Like all stimulus packages its wraps up old and new money in a shiny bundle that can have a really big headline number attached. A trillion yuan of disaster reconstruction money for the Sichuan earthquake and other natural disasters is in there, as is, for example, previously announced spending on new rail lines and a bunch of other projects already included in the current 5-year plan. So, too, is 120 billion yuan of tax cuts that will come from a change in the way value added tax is administered. If we ever get the full detail (Xinhua has this 10-point summary), there may well be less to the package than meets the eye.
The further easing in monetary policy that is to occur in parallel is scant surprise. After three rate cuts in less than two months, the fight against inflation through tightening credit was dead in the water. The abolition of commercial bank’s credit ceilings as part of the package is more to do with getting money flowing to the priority projects than it is with increasing the pool.
That all said, this is a huge stimulus package — nearly 15% of annual economic output spread over little more than two years. No matter where the balance lies between show than substance, it shows how fast China’s economy is slowing as a result of the global financial crisis, and the extent of the concern among Beijing’s leadership, whose political legitimacy depends on continuing to deliver rising incomes to all Chinese, rural and urban.