Article
4-trillion-yuan stimulus
The Chinese government announced a 4 trillion Yuan stimulus package in Nov. last year to shore up economy. The plan will finance programs in 10 major areas in infrastructure and social welfare over the next two years. The projects include: low-income housing, rural infrastructure, transportation, health services, environmental projects, technological innovation, and rebuilding from disasters, most notably the May 12 earthquake. The government will also loosen credit conditions and introduce a value-added tax reform predicted to slash industry costs by 120bn Yuan. First batch of 100 billion Yuan had arrived Anhui Province to build low-cost housing at the end of 08.
A: How much do you think the 4 trillion Yuan bailout package is going to help expand domestic demand?
X: 4 trillion is not a small number. China’s GDP is about 29 trillion. So it’s getting close to 15% or so of GDP. It really depends on how much of this 4-trillion is new money or existing programs. Where does the money go? As we discussed before, China is not sure of investment. Investment is over 40% of GDP, the highest in the world. Spending more on investment may lead to wasteful project. I think in certain areas, we do have effectiveness like spending money on railroads. I think it’s been under invested area in China and also it saves energy and that’s a good way to spend money. But in some areas, we may not want to spend too much money. I think the highway system still has room to grow. But in some areas we see that the utilization level of existing highway is extremely low already. If we are going to build more, we need to be careful. We make sure that we build the highway. There is the demand and the traffic is heavy and so forth. So I think we need to be careful about how we spend the money. And the second is in terms of new money. The central government is asking local government to come up with money to work together with the money from the central government. And local governments are in terrible financial trouble because local government depends so much on off budget revenue like land sales, the taxes from property transactions and so forth. This money they don’t have to give to the central government. In many cases, it accounts for half of the revenue for these local governments. As the property market is coming down, they might have dried out. So they are already in financial trouble. So getting them to borrow more money to support these investments could lead to more trouble. I think we need to be extremely careful about it. Instead of imposing more financial burden on the local government, the central government should issue more treasures and more bonds to fund the projects and maybe even lend money to local governments to finance their portion of the cost for these projects. I think the central government should issue treasures and bonds more than one and half trillion in order to have meaningful effect on the economy.
A: For people who are sitting home listening to these, it’s all about the government, what they are getting and these packages. How do everyday people see difference? Are they seeing a difference?
X: The“trickle down”idea is that if you invest in these projects, the money will come down to the grassroots level. The trickle down theory works to some extent, but like railroad investment for example I support, it actually does not require all the labor. It’s mostly done with machines. So the trickle down is quite limited. So I think we should not depend on fixed asset investment to support the economy. China is an over investment economy to begin with. The investment works only as a cushion in a very short term. We need to change the structure of the economy to make sure the household sector has more money to spend.
Nobel Prize winner Economist Robert Mundell suggested late last year that China should issue 1 trillion Yuan worth of coupons to all residents to boost the demand. Cities like Chengdu and Hangzhou started to implement the measure, and many more are ready to follow suit. But many economists believe giving cash back to individuals is just a short-term solution.
X: Cash back obviously is difficult for the government to realize that amount of cash. Japan is giving out consumption coupons. I’m not sure is that practical in China? In the case of Japan, household sector is relatively wealthy. They are unwilling to spend because they are worried about the future. In particular there’s aging problem, and there’s a high level of government debt. So it’s very difficult to convince Japanese household to spend because they think the government is borrowing money and they are liable for that, they will eventually paid off, that’s why they are not spending. But China is different. China’s household sector is quite poor. The income level is relatively low and the wealth level is very low while the government is very rich. The government has been investing building up assets. So 4 trillion programs aside, we need to have a fundamental reform. Even in terms of investment program, we need to support labor-intensive project. Like in building cities, that requires more people. Even in property sector for example, because the property sector has slowed down so much, they do not need construction workers like before anymore. That’s very difficult situation for migrant workers. Maybe instead of investing all the money, we should spend some money for insurance for migrant workers to give them 6 months or 9 months, every month a few hundred RMB. It doesn’t cost a lot of money and works very well. It helps social stability.
A: Is that going to in fact, maybe to keep them here in the city and not as useful to the economy?
X: We have 20 million migrant workers that have lost jobs; we have seen they have nothing to do at home. China has very limited amount of agriculture land. I think for these 20 million people who don’t have jobs, giving them 300 RMB a month is relatively small cost to the government to buy social stability. Of course, after 6 month, what if they don’t find jobs. Even in the US, the congress would pass an extension of unemployment insurance for another month so and so, but the bottom-line is that the economy needs to come back and to have jobs again. So obviously 300 RMB are very small, if they get a job they would get 1000, so obviously they would prefer to have a job. So when the economy improves, they will go to work.