The Chinese are Spending their Way to Recovery

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By Christian Fleming

SHANGHAI, Mar. 16 – Since the collapse of major financial institutions this past fall, China has been spending a fortune trying to keep their country running smoothly and continue expanding. A large part of this spending has come from the RMB4 trillion stimulus package designed to maintain growth even as world trade collapses.

The breakdown of the stimulus plan is as follows: RMB1.5 trillion in fixed-asset investment, RMB1 trillion to help rebuild areas in Sichuan affected by the earthquake, RMB400 billion for affordable-housing projects, RMB370 billion towards improving rural living standards, RMB370 billion towards technological innovation, RMB210 billion for energy-saving efforts, and RMB150 billion for health and education.

The Chinese government has pledged RMB1.18 trillion of the stimulus plan while the rest will come from provincial and municipal governments, policy loans, and corporate bonds.

Realizing that depending on exports to fuel growth relied too much on external factors from abroad; China needs to implement a strategy that would stimulate their economy by both increasing their domestic consumption while decreasing their reliance on foreign demand.

The recent stimulus plan has done that and more. Forty-five percent of the stimulus package has been directed towards fixed-asset investment in the form of roads, railways, airports, pipelines, and electricity networks, to name a few. Factories and other outdated facilities will be renovated or rebuilt while new projects will be added. So far this year, China has seen a 26 percent increase in urban fixed-investment up to more than RMB1 trillion. Furthermore, railway investment has tripled, agricultural doubled, and spending on coal-mining has increased by almost 60 percent.

“These packages are not only intended to offset the current economic slowdown but will promote industrial restructuring and upgrading. The plans reflect public concerns about efficiency and environmental protection,” said Liu Tienan, Vice Minister of the National Development and Reform Commission during a press conference last February.

The Chinese government is also using the opportunity to improve its energy conservation and reduce emissions. Special provisions have been made that will guard against the return of inefficient and heavily polluting firms.

China has spent at least RMB240 billion in energy projects since the stimulus plan was unveiled this past November. “The stimulus package presents a good opportunity for the government to balance growth with industrial restructuring and upgrading and developing a green, low-carbon economy,” Li Dun, a professor at China’s Academy of Social Science, told China Daily.

A further 25 percent is designed to alleviate hardship and rebuild areas of China that have recently been devastated by last year’s earthquake– Sichuan Province in particular.This RMB1 trillion will help reconstruct entire towns that were reduced to ruins last May.

Behind this stimulus plan, China’s Premier Wen Jiabao has announced his aim to achieve an optimistic eight percent growth in GDP for 2009, and many experts believe it is attainable.

The reason for this being that the stimulus plans focus on fixed-asset investment, which accounts for 40 percent of China’s GDP growth, will more than compensate for the loss of revenue experienced in net exports, which only accounts for seven percent of GDP.

“The export engine has died: China is in a ‘help themselves’ mode, pump-priming like crazy to increase fixed-asset investment and keep retail spending going,” said Joseph Tan of Credit Suisse Private Bank in Singapore, according to Bloomberg.

Early signs of a Chinese recovery, including a surge in lending and gains in power consumption, have helped the Shanghai Composite Index to a 15 percent gain this year.

The Chinese government has also cut taxes and loosened some policy measures. In one such case, the environmental administration has cut its review time for new developments from five days to two. In January and February this year, 246 new projects were approved with investment valued at around RMB970 billion.

At the Chinese government’s request, banks have also responded by supporting the stimulus plan; which has lead to the money supply last month to rise at its fastest rate in more than five year.

In addition to the current economic stimulus plan, China’s Premier Wen Jiabao has also stated that further funding would not be out of the question if the need were to arise.

For further reading on the issue, refer to the March issue of China Briefing. Click here to download.