On November 9, China’s government unveiled a US$586 billion stimulus package to revitalize the country’s slowing economy. The spending plan will focus on investment in infrastructure, social welfare programs, and providing tax cuts and higher export rebates for businesses over the next two years.
Beijing said it will finance 25% of the amount itself, with the rest of the funds coming from provincial authorities, corporate investors and bank loans.
Before the announcement, the wheels were in motion. In late October, the National Development and Reform Commission (NDRC) allocated most of the package’s first tranche, totaling US$14.6 billion, to local governments. The directive was simple: Spend it all during the fourth quarter.
Days after the package was made public, further details emerged on the spending: 44% on rural infrastructure and welfare housing; 25% on other infrastructure projects like railways and airports; 13% for health care, education and social welfare; 12% for energy and environmental protection; and 6% on technology upgrades.
However, some analysts said the plan actually comprises money already allocated to infrastructure and rural development rather than new funds. One estimated actual extra investment in the package at as little as US$191 billion.
Regardless of the official total, Beijing was under pressure to make a bold move. GDP growth slid to 9% in the third quarter, its fifth-straight quarterly slowdown. Before the package was announced, economists had predicted that economic growth could fall to as low as 6% in 2009.
The package will have a major effect on China’s budget – a US$10.4 billion surplus in 2007 – for the coming years. Peng Wensheng, an economist with Barclays Capital, expects the package to expand China’s 2009 budget deficit to 2.6% of GDP next year, which would still be enough to keep the economy growing by more than 8%.