November 9, 2008, and every newspaper, TV and radio broadcast in mainland China is leading with the news of President Hu Jintao’s announcement. In the face of the global financial crisis, and just days before the G20 summit in Washington DC, Hu has just pledged economic stimulus measures worth RMB4 trillion (US$586 billion), a package comparable in size with that subsequently put together by the United States from an economy with a GDP only a third as large.
China’s largesse was in one way plausible. Incoming US President Barack Obama would find himself with little recourse but to issue Treasury debt to fund the US stimulus measures, which have since come to exceed US$1 trillion. In stark contrast, President Hu could have paid for his package out of China’s gargantuan foreign exchange reserves, and still have enough left over to send his counterpart at 1600 Pennsylvania Avenue a cheque to cover the entire cost of the initial US measures.
Just over a year later, there’s some indication of the impact of China’s stimulus measures on its economy. But experts diverge on what’s coming, with some forecasting a bright new decade and others predicting disaster.
The Asian financial crisis began in July 1997, when the Thai government removed the baht’s peg to the US dollar. Months later, a number of the region’s economies were ravaged. China’s economy fared dramatically better than those of South Korea, Thailand and Indonesia-the Chinese currency and financial system were much more insulated, and foreign investment in China was overwhelmingly in hard assets like factories, rather than securities, so even those investors who wanted to spirit their capital out of the country had difficulty doing so. But the Chinese government also took some key steps to bolster its economy, increasing liquidity, investing in infrastructure and accelerating deregulation of the property and healthcare markets. The property deregulation alone has transformed China, with urban home ownership climbing from less than 35 percent in 1997 to more than 70 percent today. Home ownership has created a stakeholder society and fuelled an explosion in household goods consumption-the Ms. Zhangs and Mr. Lius walking the city streets in China these days would be unrecognizable to their parents in terms of their relationship to the economy.
The experience of the 1990s gave Beijing policymakers in 2008 some valuable lessons to draw on, and the stimulus measures introduced in the wake of the Lehman Brothers failure bore a strong resemblance to those from a decade earlier. First, they emphasized infrastructure investment: more than 50 percent of the entire RMB4 trillion in the initial package (including the RMB1 trillion ear-marked for helping Sichuan Province rebuild after the May 2008 earthquake that killed more than 65,000 people and left millions injured). Second, they included a massive increase in liquidity. Policy statements emanating from the PRC’s annual Economic Work Conference, held in December 2008, revealed that funds from the national government would not exceed 30 percent of the designated RMB4 trillion, and that 40 percent of the amount would be provided by bank lending. The government subsequently reduced reserve requirements and cut interest rates. Third, the measures included substantial regulatory change, including a lowering of down payments required for mortgages, reduction or elimination of VAT, lower fuel prices and subsidies for smaller cars (fuel efficiency) and an expansion of subsidies for consumer goods purchases in rural areas.