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Expert's View
Special> Coping With the Global Financial Crisis> Expert's View
UPDATED: November 18, 2008 NO. 47 NOV. 20, 2008
CRISIS FOCUS: Healing the Markets
 
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The government swiftly came up with a series of measures on November 5 to prop up the nation's economic growth amid a possible global economic recession. Will the stimulus package be a panacea for the Chinese economy in a slowdown? What far-reaching implications will it have for the economy in the future? Zhuang Jian, an economist at the Asian Development Bank, discussed these issues in his blog. Excerpts follow:

As the subprime mortgage crisis plays out to be a global growth-retarding shock, unprecedented gloom emanating from Wall Street has spilled over into the broader economy of the Western world, clouding the prospects of the once-robust Chinese economy. In the face of bearish stock markets, stagnating property sales and sluggish investments, the Chinese economy has been draining its driving force for the next two years. It's believed that the economic growth, if left unrescued, may ease to 8 percent, the psychological bottom for the country.

The forceful stimulus package arrived just at the right moment and is even more forceful than the one put in place in 1998 to counterbalance the economic contraction in the aftermath of the Asian financial crisis. The 4-trillion-yuan ($586 billion) fiscal stimulus package is expected to contribute an additional 2-3 percentage points to the economic growth rate over the next two years.

Nine of the 10 stimulus policies enacted by the State Council on November 5 are fiscal measures, underlining the country's sweeping fiscal power to widen domestic demands. Of the nine proactive fiscal policies, seven are aimed at bolstering investments, either by the Central Government or the public, suggesting that investments, instead of consumption, remain the country's major leverage to fuel domestic demands.

In comparison with the situation in 1998, the stimulus plan shows some difference this time. The first is accelerating the construction of low-rent housing. A housing boom would effectively breathe steam into a series of upstream sectors, such as steel, cement, machinery and the chemical industry. The second is infrastructure improvement on railways, rural irrigation projects and urban pollution treatment, as well as the rehabilitation of quake-devastated Sichuan Province. The third is technical innovation and industrial upgrading. The fourth is energy conservation and emissions reduction. Besides this, the impending reform of the value-added tax system could be able to lift about 120 billion yuan ($17.6 billion) in tax burdens off the country's enterprises.

There is no doubt that the "proactive" fiscal policy and "appropriately accommodative monetary" policy are timely and necessary steps in response to simmering global jitters. But these short-term macro controls have taken little account of the country's long-term goal of balancing its growth model. Over dependence on investments to fuel growth may complicate the country's future efforts to foster consumption. Additionally, the monetary policy may unfold to be completely loose in practice, sowing the seeds of non-performing loans.

After all, the Chinese economy, having gained more strength and resilience through several adjustments, is also bound to head off the current crisis, which is the most challenging one ever. That would be a significant contribution to the stability of Asia and the whole world amid global downturns.



 
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