Notes On The News With Paul Maidment

China Announces Massive Stimulus Package

Paul Maidment, 11.09.08, 02:07 PM EST

586 billion will be spent to boost domestic demand in the face of a slumping export market.

Ever since it reported sharply slower economic growth in the third quarter (9% vs. 10.4% for the first half) China's top officials have been signaling that an economic stimulus package was coming to boost domestic demand and that the tight monetary policy imposed earlier this year would be eased.

Today, China's media announced that the State Council, the country's highest decision-making group, had approved at a meeting on Wednesday a package of capital spending plus income and consumption support measures. This confirms that damping down inflation in a runaway economy is no longer the policy priority. The top economic concern is now arresting the rapid slowdown in growth as a result of the slumps in China's exports in the wake of the global financial crisis.

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Four trillion yuan ($586 billion) will be spent on upgrading infrastructure, particularly roads, railways, airports and the power grid; on raising rural incomes via land reform; and on social welfare projects such as affordable housing and environmental protection.

The package also wraps in some of the disaster reconstruction spending from last winter's abnormally severe weather, the Sichuan earthquake in May and other natural disasters. It ties together many policy initiatives already underway as the country's leadership tries to close a potentially destabilizing income gap between the rich coastal cities and the poorer interior countryside.

In addition, China indicated a shift to "moderately easy" monetary policy. After three interest rate cuts since mid-September, the easing in monetary policy was a given. A long-expected change in the way value-added tax is administered will also provide tax cuts.

The sums involved are substantial. By comparison, the U.S. pumped $100 billion into its economy in the summer via tax rebate checks. Germany has just announced a $65 billion stimulus package. Both economies are larger than China's.

China's stimulus package amounts to nearly 15% of annual economic output spread over barely two years. Another yardstick of its scale: In the Asian financial crisis of 1998, China responded with a package worth just 1.2% of gross domestic product.

Beijing has little choice. As our columnist Nouriel Roubini wrote on Nov 6:

"In a country with the potential growth of China, a hard landing would occur if the growth rate of the economy were to slow down to 5% to 6%, as China needs a growth rate of 9% to 10% to absorb about 24 million folks joining the labor force every year--it also needs to move about 12 million to 14 million poor rural farmers every year to the modern industrial and manufacturing urban sector.

The whole social and political legitimacy of the Communist Party's regime rests on continuing to deliver this high-growth transformation of the economy. Therefore, a slowdown of growth from 12% to 5%-6% would be the equivalent of a recession for China. And now a variety of macro indicators suggest that China is indeed headed toward a hard landing."

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