Summary
China’s announcement of the stimulus package aroused much excitement and many questions. Here are some of our answers to the most frequently asked questions.
How much of the 4 trillion is new? What is the contribution to GDP growth?
It is not clear how much of the 4 trillion RMB ($586 billion) is new, and what subset of the new spending would come from the government’s budget. The 4 trillion can not be viewed simply as the size of the stimulus, as some of projects have already been planned, and some of the spending will likely be carried out by state-owned enterprises affiliated with the government. Also, the 4 trillion only refers to investment needs and does not include the tax cuts and transfer payments to farmers and the poor. We expect more details in the coming weeks.
We do not expect the government to spend additional 2 trillion a year from its budget and have a deficit of 7% of GDP in 2009. Government investment included in the budget was about 3% of GDP in 2007, and we could see this rise by an additional 300-400 bn RMB a year, or 1-1.3% of 2009 GDP. Again this would not include the tax cuts and transfers, which could be another 0.5% or more GDP. This is what we have incorporated in our 2009 forecast, and is consistent with the announced Q4 08 incremental spending of 100 bn (0.34% of GDP), and the size of stimulus in 1998/99 (1.5-1.8% GDP). We do not plan to revise the assumption until we have more evidence.
As for the 2 trillion a year (6% of GDP each year) investment spending, even if all of that is new, it would be to offset the expected decline in investment elsewhere (such as housing and export related manufacturing). So we can not simply assume overall investment would be this much more.
The bulk of the investment will likely be carried out by state-owned enterprises and investment arms affiliated with the central or local governments, financed by their own revenue, corporate bonds, and very importantly - matching bank lending.
How will China finance the stimulus package?
The additional government spending will be financed by government bond issuance. The government has a relatively small debt (debt/GDP ratio is less than 20%), had a budget surplus last year, and was planning for a surplus this year. China can easily finance a deficit of 2-3% of GDP each year (or more if necessary).
Investment carried out by government sponsored state owned investment companies would be financed by the capital market and bank lending. We expect a significant portion of the funding will come from matching bank loans. This is what happened in the previous episode of major fiscal stimulus (1998/99) as well.
Chinese banks have ample liquidity to increase lending if they wish, and China does not need to (nor is expected to) sell its USD treasury to finance the stimulus.
Wasn't most of the spending already planned?
It is true that most of the priority projects have been mentioned before one way or the other. However, the importance of the announcement over the weekend is that details and substance have been added to the government's policy discussion over the last two months.
Also, the various 5-year plans (for each sector and ministry) that contain most of the projects are long-term guidelines, and do not constitute actual investment plans even if they contain some investment numbers. We know that not all of the announced spending can be new spending, but we would like to point to the immediate extra spending of 100 bn in Q4 08 as a guideline.
Worth noting is that the government is clearly focusing very much on investment and construction, not on tax cuts as many have anticipated and advocated over the last few weeks. We think this is the right approach when sentiment is weak.
Will we change our forecast because of the announcement?
No. We have already largely anticipated strong fiscal and monetary reactions from the government. The announcement is in line with our forecast. We do feel more comfortable with our 7.5% growth for 2009, and see the upside and downside risk now balanced.
Although the government has come out pretty strong and relatively early with the stimulus details, China is yet to be hit by a serious export downturn (export growth is still above 10% in real terms), and housing investment is still heading down. We expect the overall growth to continue to slow in the next 2 quarters, with the policy trying to prevent the decline from becoming too deep.
What else would we be looking for?
We expect more details on the amount of government spending in the stimulus, some after the economic conference in 3 weeks, and more in the weeks after, but almost certainly by next March when the National People’s Congress approves the 2009 budget and economic plan.
We still expect additional credit and land policy measures to encourage more private sector investment in the mass market of residential properties. We are glad to see that public housing investment is top of the 10-point plan, but public housing spending alone can not pull the whole housing sector investment out of the downward trend. More would be needed.
We would be watching bank lending closely and expect it rising visibly as a share of GDP. We see fiscal stimulus as jump starting the economy, and bank lending as the fuel that keeps the growth going. | 
发表于 2008-11-11 10:48
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