Will The Fiscal Stimulus Help China?

Recently, China announced a 4 trillion yuan (US$586 billion) fiscal stimulus package. But will this measure, designed to stimulate domestic demand through infrastructure and investments, help to keep current pace of growth for the world's fourth biggest economy?

Probably not. In our opinion, the fiscal stimulus package is likely to be much more effective than the reserve requirement adjustments and interest rate cuts, but may not bring the expected outcome. Indeed, China's economic growth has already slowed significantly. In the third quarter, gross domestic product has risen only 9 percent, the slowest pace in five years. In fact, we should not forget that China's economic growth main driver is not domestic consumption but exports. However, since the global economy is weakening, the demand for Chinese products is falling and export orders are diminishing. With the deteriorating exports the industrial production growth is slowing down, the factories reducing the workforce and unemployment is growing. Also, the housing market is showing the signs of slowdown and credit is becoming less available. For example, the house sales by volume plunged by more than 50% in the first eight months from a year earlier. Finally, even though China is now considered to be a open market economy, the stimulus package gives the impression that the government is taking center stage. In addition, although there are tax brakes to the companies, no personal tax cuts were given to boost the private consumption. 

Anna Fedec, contact@tradingeconomics.com
11/12/2008 8:28:18 AM