You are here：China Business Focus >> Companies in China>> Article
As the financial crisis sweeps across the world, China's central government will use a 4 trillion Yuan (USD 571.4 billion) stimulus package to boost the economy and increase domestic demand.
 
On November 5, the State Council's Standing Committee decided to inject 4 trillion Yuan (USD 571.4 billion) into the economy over the course of the next two years. Insiders described the plan as containing "positive financial policies and appropriately loose monetary policies". The government plans to implement the new policies with a "fast handle, strong force, correct measures and practical work".
 
In response to the publication of the news on November 9, China's A Share market increased steadily for a week. Overseas markets reacted positively as well.
 
This represents a major turnaround for the Chinese government policy wise, the first time it has implemented a large-scale economic stimulus plan.
 
The two financial policies in 1998 and 2008 were the same in terms literal description – the "positive financial policy" or expansionary financial policy - but the two monetary policies have major differences. The monetary policy in 1998 was "steady monetary policy" while this year it was the "appropriately loose monetary policy". This meant that this year's economic stimulus plan will be larger than the previous one, while at the same time drawing from the experiences and lessons of the previous one: if a "steady monetary policy" is implemented at the same time as an expansionary financial policy, the effect is just like braking while stepping on the gas. That meant the financial investment from the government squeezed out investment from the general public, resulting in a change of the investment structure with limited increase in the total volume. In 1998, the total volume of investment in fixed assets in China was 2.85 trillion Yuan (USD 407.1 billion), up by 14.1%, of which the investment from national economy was 1.57 trillion Yuan (USD 224.3 billion), with the growth rate of 19.6%. The "appropriately loose monetary policy" should be implemented with a "positive financial policy", which should prove more helpful in stimulating the economy.
 
During the past ten years, China's economy has made huge strides. In 1998, China's GDP was 7.955 trillion Yuan (USD 1.136 trillion). Its financial income was 990 billion Yuan (USD 141.4 billion) and the financial deficit was 92.2 billion Yuan (USD 13.2 billion), about 10% of total financial income. This year, China's GDP was estimated at 27 trillion Yuan (USD 3.9 trillion), 340% of the one in 2008. Financial income was estimated at 6 trillion Yuan (USD 857.1 billion), about 6 times that of ten years ago. More financial income means a larger space for financial policy to operate. Take the financial deficit for example; if it can keep the same level as that in 1998, there will be a space of 600 billion Yuan (USD 85.7 billion) which is derived from the financial deficit.
 
In 1998, a series of reforms of the state-owned enterprises, houses, medical and foodstuff were carried out one by one. Along with these reforms were layoffs and a large increase in financial payout. The basic idea of the "positive financial policy" implemented in 1998 was to deal with the Asian financial crisis and, in combination with the strict tightening policies having been implemented for several years before 1998, to pay for the stimulus packages on an as-you-go basis.
 
This year's "positive financial policy" is a simpler economic stimulus plan, and makes no explicit attempt to pay for the cost of reforms. The cost mostly comes from China's economic growth pattern formed in the past several years. In this pattern, the economic development depended on the second industry too much, generating the huge productivity far beyond the demand of the domestic market. The excessive productivity must be consumed by the foreign market, which resulted in a huge trade surplus. As a result, China's economy is highly responsive to even tiny occurrences in the foreign market or international money supply.
 
When there are stirrings in the loins of the foreign market, it is only practical to pay serious attention to the domestic market. It is undoubtedly a wise and rational choice to use the financial investment to stimulate economic development when the enterprises cannot adapt to the adverse investment environment and has shown no willingness to increase the investment.
 
However, this should be viewed as a special case. Railways, highways, and the like will be constructed sooner or later. During bad economic times, natural opportunities for economic growth are often limited. The government has therefore constructed its own in order to prevent an economy-wide slump. But this should be viewed as only a band-aid solution, not a permanent cure.
 
Over the long term, China needs to focus on increasing its industrial capacity, which can reduce unemployment and provide gargantuan increases in demand.
 
In addition, tax-reduction seems not to be a "positive" financial policy, but its contribution to healthy development may be equally large as direct investment by the government. So it was certainly included in the ten main measures mentioned above. It is said that this policy can save the enterprises 120 billion Yuan (USD 17.1 billion), an amount smaller than the 4-billion-Yuan plan, but still a considerable chunk of change.
 
The US government also published its 700-billion-USD rescue plan, of which 150 billion US dollars will be used for tax reduction, a little more than 20%.
 
It is interesting to compare the rescue plans of China and the USA.
 
The US bailout is quintessentially American in nature. The 700-billion-USD plan was proposed by the US Treasury Department to the Congress. However, it was denied in the first round of voting. The US Treasury Department had no option but to modify the plan several times. After about half a month, the plan was finally approved by the US Congress (the 150-billion-USD tax-reduction plan mentioned above was added during the modifications). Compared with the high efficiency of China's government in issuing the plan, the actions of the US government cannot possibly be described as "fast handle".
 
However, while China is more efficient in pushing through policies, the question remains whether its investment benefit is better than the USA's. Considering the outcome of the previous "positive financial policy", concern is not unfounded. Apparently, the decision-makers of China recognize this problem. On November 16, the "Leading Team of Central Committee of CPC for Studying and Implementing Scientific Outlook on Development", which is well-versed in the basic development theory of China, issued a note, declaring that repetitious constructions must be prevented during the process of increasing China's domestic demand. Local governments of different levels must take measures to fight against the pork-barrel projects, no matter useful or useless, that tend to sprout with near-mycological fury.
 
Judging by number alone, the four trillion Yuan is about equivalent to the 700 billion US dollars. However, if you examine the details, you can see, great differences between the two plans.
 
The US 700 billion US dollars come from the federal finance and the Federal Reserve and will be used to register capital and reduce taxes. Briefly speaking, the government will buy stock in various failing enterprises. In the future the government can sell these stocks at its leisure.
 
The sources of China’s four trillion Yuan will not be limited to its central government's finance. It will be composed of elements from the central finance, , the local finance, and the folk investment. The exact proportion of the contributions of the three parties to the four trillion Yuan is not yet known.
 
Another main difference is the mode of investment. The US mode has been mentioned above; China may elect to do something entirely different. Rather than trying to save failing companies, the Chinese government may finance a series of massive public works projects, reminiscent of America's New Deal. Perhaps this new style will lead to a bright new era for the Chinese economy.
Prv：[December 2008] Opening A Door to Happiness[0][2009.01.22] Next：[December 2008] Higher Export Rate[0][2009.01.22]