RECOVERY: Citizens go shopping in Shenyang, the capital city of northeast China's Liaoning Province, on January 21, 2010. China's economy rose 8.7 percent during the first six months of2009, thanks to the 4-trillion-yuan ($586-billion) stimulus package passed in November 2008 (LI GANG)

By the end of 2010, China will end its 4-trillion-yuan ($586-billion) stimulus program, which was enacted as a response to the global economic crisis originated in the United States in 2008. The crisis dealt a heavy blow to the global economy. In the wake of the crisis, China rolled out a series of measures designed to stimulate domestic consumption. As a result, China was one of the first countries to recover from the crisis; the program allowed China to contribute a great deal to the global economy's recovery.

Two years later, experts are wondering how to evaluate China's stimulus policy. How should China adjust its policies in the face of new issues? Zhang Xiaojing, Director of the Macro Economics Research Office at the Institute of Economics under the Chinese Academy of Social Sciences (CASS), answered these questions and more in a recent article in China Comment magazine. An edited excerpt from his article can be found below.

Stimulus plan effects

It is too early to evaluate the stimulus package plan launched amid the global financial crisis of 2008. However, some comments could still be made about the plan and its results.

According to statistics released by China's National Development and Reform Commission (NDRC) in March 2010, the 4-trillion-yuan stimulus package was divided in the following ways:

Forty-four percent went to livelihood projects; 16 percent was invested in areas such as independent renovation, structural transformation, energy saving and emission reduction and ecological construction; and 23 percent was allocated to construction of significant infrastructure facilities. Meanwhile, 14 percent of the stimulus package went toward rebuilding Sichuan Province's devastated counties and towns during Wenchuan earthquake in May 2008. The remaining three percent was invested in other public expenditures.

The results show a great difference when compared with the original plan, which would have invested as large as 45 percent of the package in infrastructure facilities such as railways, highways, airports and power plants. Investment in livelihood projects only accounted for 17.25 percent of the original plan.

As a whole, the stimulus package has played a significant role in raising confidence in the market, increasing employment and improving the quality of life of people with lower incomes. However, the stimulus package also had some negative effects, despite reviving the sagging economy.

The accelerated creation of more local financial companies is one of the adverse byproducts of the stimulus package. Statistics from the China Banking Regulatory Commission (CBRC) showed that 2 trillion yuan ($294.12 billion) out of 7.66 trillion yuan ($1.26 trillion) of loans by local financing banks were found to be at risk of defaulting. This was inevitable, since many governmental financial departments lacked capital.

The Chinese Government pumped 9.6 trillion yuan ($1.4 billion) into the market in 2009. Despite the target of 7.5 trillion yuan ($1.1 trillion) set by China's central bank, the People's Bank of China, the figure is expected to exceed 9 trillion yuan ($1.34 trillion) this year. The combined loan amounts total an unprecedented record of nearly 20 trillion yuan within the two years. This is the result of the adoption of a moderate loose monetary policy, which is another result of the stimulus plan. As a result, asset prices have risen and inflation risks have escalated as well. The Chinese Government is expected to set a lower target for new lending for 2011 as it strives to combat price hikes, experts have said.

As a result of the 2008 crisis, the government adjusted property policies and offered favorable loan terms to boost the real estate market. Although the boom of the real estate sector has driven economic growth, it has also brought problems such as elevated housing costs.

Meanwhile, China has relaxed its policy to limit exports of energy-intensive products, leading to the rise of energy consumption for per unit of gross domestic product (GDP) of the first six months in 2010.

The Central Government shouldered the risk of debt for both state-owned enterprises and local governments, which has in turn created new dangers. The stimulus plan and administrative regulation will distort China's economic structure, causing inefficiency and corruption.

Finally, direct government administrative regulations, such as the central bank's changing of the reserve requirement ratio of commercial banks, control of housing prices and the recent blocking of Public Housing Fund mortgages for third-home buyers, will cause drastic fluctuations in the economy, mostly because of the lack of real market feedback.

Recent economic trends

China has long dealt with the dilemma of guaranteeing economic growth while simultaneously adjusting its economic structure. At an annual central economic working conference held at the end of 2007, the government began to readjust its economy, focusing on preventing inflation. However, the global financial crisis forced the conference's focus to shift to guaranteeing economic growth. Readjusting China's economic structure has not received any kind of priority treatment in quite some time.

China's economic growth rate for the first three months of 2010 hit 11.9 percent, indicating that the economy was starting to overheat. The government began to adopt tough measures to adjust the economy, including liquidating local financial companies, implementing new local real estate policies, enforcing energy-saving and emission reduction policies, restarting renminbi exchange rate reforms, adjusting export tax rebates and raising the minimum wage.

However, economic growth for the second quarter of 2010 has been lower than expected because of unexpected changes that resulted from the combined effects of these policies. The government has begun to worry if the economy will plunge for a second time. This was the impetus behind the tightened financial policies of the second quarter; these policies began to relax in the third quarter.

Possible macro policies in the future

The 12th Five-Year Plan will be implemented in 2011. Local governments will face a new round of elections in 2012, they are therefore enthusiastic about implementing the new plan properly. If the energy conservation and emission reduction targets set by the 11th Five-Year Plan (2006-10) are reached by the end of 2010, financial policies will be relaxed in the first six months of 2011. All these factors could lead to fast economic growth, triggering inflation and property price hikes.

Since China's current economic growth is relatively stable, expectations for inflation have intensified. Future policies will therefore pursue further normalization of the macro economy, focus on management of inflation and highlight structural readjustments.

The government will focus on controlling the pace of total credit growth, gradually increasing interest rates in order to normalize their monetary policy. For instance, the government may shift from a relaxed monetary policy to a more stable one.

It is obvious that large investments in the market will lead to some economic risks, such as rising property prices. The other risk is inflation pressure. China's consumer price index (CPI) for October 2010 hit 4.4 percent, and the figure for 2011 will perhaps exceed that of 2010—higher than 3 percent, as the National Development and Reform Commission has predicted.

The government should implement a definite policy to transform its growth pattern, even at the cost of the overall economic growth rate. Every sector of the economy should prepare for these changes, so as to hasten the completion of restructuring.

To face dwindling international demand, the government should eye the expansion of domestic consumption. Future economic growth would rely on domestic mobility, efforts should be made to strengthen supply management and improve efficiency in this area.

The government needs to optimize investment structures, promote taxation reform and prevent monopolization in supply. Meanwhile, private investment should be encouraged continuously.