In an effort to counter the global economic downturn, the Chinese government announced on November 9 that it would inject $173 billion of its massive reserves into its slowing economy, with businesses and local governments contributing an additional $413 billion. With this nearly $600 billion stimulus package, China hopes to reverse its slumping economic growth, which stood at 9% in the third quarter, down from 11.9% a year before. Fourth-quarter figures are almost certain to be even worse; some economists predict a 6% growth rate for 2008′s final three months. While such growth rates are high compared to more developed countries, China finds itself in a different situation: economist Nouriel Roubini estimates that it needs a growth rate of 9-10% just to absorb the 24 million people who enter its workforce every year, including the millions of migrant laborers abandoning the countryside for the cities.
Given such concern about China’s economic growth, news of this huge stimulus package was initially well-received by governments and economists worldwide. David McCormick, the U.S. Treasury’s Undersecretary for International Affairs, predicted the bailout would “have a very positive impact.” The International Monetary Fund’s managing director, Dominique Strauss-Kahn, hailed the “good news” and said he was “very happy.” And Australia’s Prime Minister, Kevin Rudd, called it an “extraordinary fiscal stimulus package.” On the world’s editorial pages, the happiness morphed into China envy. The San Francisco Chronicle contrasted the U.S. bailout, which it said benefited “insurance-company executives [...] sending their employees on luxury resort vacations,” with the Chinese plan, which calls for spending money on “tax cuts, infrastructure, and social programs such as health care and education.” The Boston Globe marveled at China’s good timing in building up “enormous reserves in the recent boom years” compared to the U.S.’s negative savings rate. A Wall Street Journal opinion piece by Qiao Yu about the stimulus was given the subtitle “How else will the Dems finance their spending programs?”
But as the Chinese government began to release the details of the package, the global reception cooled. The figure that was announced to great fanfare, 4 trillion yuan ($585 billion), apparently included investments that were already slated to happen, as well as estimated investments from Chinese businesses as a result of lessened tax burdens and from China’s notoriously inefficient and corrupt local governments. Chinese officials have said that a “large part” of the total package represents new money, but have not given many specifics, though they have admitted that the figure includes Sichuan earthquake disaster relief funds. Ambitious infrastructure projects like these, which account for the largest portion of the package, are nothing new for China’s central government.
Since it owes its legitimacy and popularity largely to the rapid economic growth it helped usher in over the last thirty years, China’s government must maintain those trends and convince its people that it has the current economic situation under control. It’s under pressure to inflate the announced figure of the stimulus package. So far, it has worked. The Shanghai Composite Index, currently at one-third of its 2007 peak, is up 16% from its low just before the stimulus was announced. Chinese people are watching the American economy suffer while China’s remains steady, and that has an enormous effect on the national psyche.
Beijing, however, still faces several fundamental problems that cannot be solved by money alone. First, the fact that the Chinese government has closely guarded the details of its plan illustrates the lack of transparency in China. Second, China’s local governments have repeatedly demonstrated an inability to direct investments in a skillful and honest fashion. As a result of both the current economic climate and this governmental dysfunction, consumer confidence has dropped by a notable margin.
Moreover, China has a poor track record on financial interventions of this nature. Previous stimulus packages have failed, including the Three Gorges Dam project, a partially enacted $1 trillion stimulus in 1998, and an unnecessary package in the wake of the 2003 SARS epidemic. The latter contributed to several years of high inflation. With such little information about this most recent stimulus package coming out of the Chinese government, there’s no way of knowing whether it will be a success or merely the next in a series of disappointing attempts.