World - A New deal for China

SIMON ELEGANT

China announced a huge economic stimulus package on Sunday, pledging to spend some 4 trillion renminbi - about $586 billion - on a wide range of moves designed to boost an economy starting to feel the effects of the worldwide financial crisis. The move was widely welcomed by economists and investors. The Hong Kong Stock Exchange's main index gained 3.5% on the following day, while the Shanghai Composite Index soared 7.7%.


While the short-term boost that the plan would give to China was the center of attention in Asia on Monday, some analysts said the move marks a significant turning point in the development of China's economy that will be felt for years to come. "I think in a decade, we'll be looking back at this moment and saying, 'This was it. This was when things really changed and China's economy transitioned from externally, export-oriented to an internal focus,'" says Ben Simpfendorfer, a China economist with the Royal Bank of Scotland in Hong Kong. He Liping, a professor of economics at Peking University, agrees. "I personally see this crisis as an opportunity to reduce our dependence on export and adopt a healthier path," he says.


Xinhua, China's official news agency, reported that the package's spending over the next two years will be aimed at 10 major areas, including "low-income housing, rural infrastructure, water, electricity, transportation, the environment, technological innovation and rebuilding from several disasters, most notably the May 12 earthquake." While the details of exactly when and where the money will be spent were not revealed, Sunday's announcement did make it clear that the government not only aims to boost its spending on infrastructure and projects but also seeks to get notoriously savings-obsessed Chinese consumers - who boast the highest household-savings rate in the world - to do more spending of their own. The package proposes to do this by, among other things, cutting taxes and abolishing existing limits on commercial banks' credit-lending. The plan also advances the government's oft stated desire to improve living conditions in the countryside, where residents earn about a third of what urbanites pull in - a situation Beijing rightly considers a threat to the country's social stability.


Taken together with the recent expansion of social welfare and amendments to the rural land law that will enable peasants to effectively lease out the right to use their land, the changes amount to a "New Deal with Chinese characteristics," JPMorgan economist Jing Ulrich wrote in a recent report. They also represent a political triumph for President Hu Jintao and his Premier, Wen Jiabao. The two men have been stressing the importance of measures aimed at relieving poverty in the countryside since coming to office in 2003. Until now, their efforts to enact concrete measures to back those promises have often been frustrated by opponents within the Communist Party who believe the government's No. 1 priority should be to continue encouragement of booming economic growth.


Despite the stock market's euphoric reaction and the positive reviews by analysts, economists warned that the effects of the measures will take time to work through the system, with the largest impact not likely to be felt until 2010. "I think that we'll see a couple of weak quarters in 2009," Simpfendorfer says. While the size of the package was welcome, "it's the speed of its implementation that is really important," he says. "My concern is that the contraction in demand will take place before the fiscal policies have time to take effect." To an economy heavily dependent on exports, that period between stimulus and response could have significant implications. With up to 2.5 million migrant workers in the Pearl River Delta forecast to lose their jobs in the coming months as the worldwide economic crunch deepens and many already flooding back home to their villages, some political analysts have expressed concern that social unrest in rural areas could worsen.


Another worry that goes hand in hand with stimulus packages like this one is the possibility of stoking inflation. For the moment, though, Beijing can breathe easy on that issue. After wrestling to control rising inflation over the past 18 months, the government reported recently that China's Producer Price Index "declined sharply to 6.6% year-on-year in October, from 9.1% in September," Ulrich of JPMorgan wrote in her report. She noted that the Consumer Price Index, which will be released this week, will also moderate further from last month's level of 4.6%, which was the fifth successive monthly decline.