China Unveils 4 Trillion Yuan Stimulus Package

The leadership has been signaling for weeks that a massive stimulus package was coming and today Xinhua announced details of 4 trillion yuan of spending approved by the State Council on Wednesday.

A stimulus package estimated at 4 trillion yuan (about 570 billion U.S. dollars) will be spent over the next two years to finance programs in 10 major areas, such as low-income housing, rural infrastructure, water, electricity, transportation, the environment, technological innovation and rebuilding from several disasters, most notably the May 12 earthquake.

Like all stimulus packages its wraps up old and new money in a shiny bundle that can have a really big headline number attached. A trillion yuan of disaster reconstruction money for the Sichuan earthquake and other natural disasters is in there, as is, for example, previously announced spending on new rail lines. So, too, is 120 billion yuan of tax cuts that will come from a change in the way value added tax is administered. If we ever get the full detail, there may well be less to the package than meets the eye.

The further easing in monetary policy that is to occur in parallel is scant surprise. After three rate cuts in less than two months, the fight against inflation through tightening credit was dead in the water. The abolition of commercial bank’s credit ceilings as part of the package is more to do with getting money flowing to the priority projects than it is with increasing the pool.

That all said, this is a huge stimulus package — nearly 15% of annual economic output spread over little more than two years. No matter where the balance lies between show than substance, it shows how fast China’s economy is slowing as a result of the global financial crisis, and the extent of the concern among Beijing’s leadership, whose political legitimacy depends on continuing to deliver rising incomes to all Chinese, rural and urban.


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Filed under Macroeconomy

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