China Considering Stimulus Package, Oh My!

If you had any doubt that China would remain unaffected by the global slowdown, that should be put to rest by various stories discussing that the Chinese government is mulling a stimulus package. Yes, you could argue that the economy might need a tap on the gas pedal to compensate for all the factory closings and pre-Olympics restrictions. But the flip side is there was a lot of infrastructure and prettying-up spending in anticipation of the sporting event, so those might offset each other in the macro sense. Similarly, even though the tourist turnout was disappointing, the Chinese apparently bought quite a bit of Olympics memorabilia.

I seem to remember that the assumption heretofore that China would still have 8% growth (versus its recent 11%-12%) even with a global slowdown. But anything much below that level would be deemed to be a Very Bad Outcome. So the unanswered question at this juncture is what level of growth the officialdom foresees without a stimulus program in place.

This sighting came from Forbes today (hat tip Ben Bitroff):

China is considering a 370 bln yuan package of fiscal expenditures and tax cuts to stimulate the economy, the Economic Observer reported, citing a source close to the matter.

The report said said the plan includes 220 bln yuan in government spending and 150 bln worth of tax cuts.

The plan received initial approval from the Central Leading Group on Economic and Financial Affairs, a body under the State Council, but further details will be finalized by the finance ministry and other government departments.

Michael Pettis, in his China Financial Markets blog, gave longer form commentary on the fiscal stimulus plan rumors, and more important, some signs that the economy might be weakening (as opposed to growth merely slowing):

Economic numbers are ambiguous, and I think most participants are hoping for some sort of fiscal stimulus, while at the same time dreading that it won’t make much of a difference anyway. I think there is also a lot of nervousness about a psychological post-Olympic let-down. After all the anxious excitement of the Olympics, with the constant, non-stop coverage in the press and on television, there will be little left of the color and excitement and a lot of work repairing the disruptions. I don’t know when and how the many migrants and poor who were ejected from the city will return, but I would guess that their welcome will be muted. Meanwhile we have been getting sporadic press reports about the cost to farmers within the region of the Olympics water policies.

The main thing is that now that the Olympics are finally over, we should quickly return to a less colorful reality, and policy-makers and analysts will get back to trying to figure out what the next few months are going to look like. Today there was confirmation of sorts of the fiscal stimulus package reported last Tuesday in a JP Morgan note. One of the most widely read of local financial periodicals, the Beijing-based Economic Observer, had an article in today’s paper citing unnamed sources who claimed that the CPC’s Central Financial Leading Group had put together a fiscal plan to support a faltering economy, although this plan had yet to be revised by the Ministry of Finance or approved by the state Council….

If there really is such a program and if it is executed, and the newspaper cites an unnamed MoF official who claims that the proposal would have to go through many more stages before it became policy, the total fiscal stimulus would amount to a little under 1.5% of GDP.

Meanwhile Gregor Neuman alerted me to an article in today’s ChinaStakes. According to the article, in July, for the first time since 2003, tax growth has experienced a dramatic decline:

According to Ministry of Finance (MoF) statistics, China’s total revenue in July was RMB 532.325 billion, an increase of 13.8% over the same month last year. But this growth rate is 19.3 percentage points lower than in July, 2007, and 19.7 percentage points lower than the growth rate in the first half of the year.

The article goes on to say most sources of tax revenues showed sharp declines in growth rates, with corporate income tax actually down 4.2% from last July….

[I]t is worth noting that these numbers seem extremely volatile….

Meanwhile, tax from land and real estate, a major source of the local governments’ incomes, has also declined drastically…Land transfer income has also decreased, due to the real estate market doldrums….

Liu Heng thinks the tax decline “won’t be a big problem”, since China has put a certain amount of money from its tax income every year into a rainy day account.

Perhaps. Unfortunately, as the saying goes, when it rains, it pours.

While this may be a short-term blip, one of the comments in the ChinaStakes article was that the decline in corporate tax receipts would probably persist. If a real slowdown is in the offing, neither China nor the world is prepared for it.

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  1. Alfred

    Mr Pettis argues that in many ways the current US experience is not relevant for China. Fixed asset investment (FAI) in China was up a stunning 27% in Jan-Jul period compared to a year ago. FAI is surging which according to Mr. Pettis suggests “a future surge in industrial production”.
    One could speculate that this surge in FAI was at least partially responsible for the stabilisation of commodity prices.

    Michael Pettis: Anniversary of Nixon’s price controls

  2. mxq

    A huge problem, that will compound any slowdown in China, is the inefficient allocation of capital.

    For example, the largest mall in the world is the South China Mall. “With space for 1500 stores, only a dozen stores open for business.” It’s been open for a few years now.

    This type of government-led, poor investment decision-making will only serve to exacerbate a slowdown, as it is fixed in nature and, i would imagine, does not respond to fiscal stimulus very well.

  3. doc holiday

    Off topic, but worth a look IMHO: FDIC Boosts Number of ‘Problem’ Banks, May Raise Premiums…raise-premiums/

    he number of “problem” institutions grew from 90 at the end of March to 117 at the end of June. Total assets of troubled banks jumped from $26 billion to $78 billion in that time (though $32 billion of that was accounted for by IndyMac Bank, which failed July 11).
    In October, the FDIC is going to propose raising assessment premiums on potentially all banks to replenish its deposit insurance fund. The FDIC said its deposit insurance fund fell to 1.01% of all insured deposits at the end of the second quarter, a very low level that doesn’t even take into account all potential losses from IndyMac in the third quarter. Such a low level forces the FDIC to come up with an action plan in 90 days.
    Banks continued to set aside huge levels of loan loss reserves. At the end of June, banks had $50.2 billion in these reserves, compared with $11.4 set aside at the end of June 2007.
    The banking industry’s net income was $5.0 billion in the second quarter, the second lowest tally since the fourth quarter of 1991.
    At the end of June, 2.04% of all the banking industry’s loans and leases were noncurrent, the highest level for the industry since 1993.

  4. CrocodileChuck

    We have read that 80% of the loans in China’s state owned banks are non-performing. For a peek at THIS movie, see Indonesia ten years ago after the ’97 Asian economic crisis. It’s taken them years to recapitalise-and they’re still not back to where they were in the mid-nineties


  5. FairEconomist

    Are they still restraining growth by requiring banks to have massive reserves? I thought they were requiring reserves in the high teens. Pretty schizophrenic policy if they are.

  6. Anonymous

    Apparently no economy can be satisfied with nominal growth after the get rich schemes of over-leverage if you are not growing you are shrinking, savings is meaningless in these modern day economies. The commoners will suffer as countries try to grow themselves to superpower status.

    Look at Iran, can’t refine enough oil from their wells to meet homeland needs and now have to buy wheat from the US to feed their own but wants superpower status. The only outside threat from the world is their own perceptions.

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