Several months ago, in the midst of a tussle with inflation, China’s government said it was mulling price caps for a range of food products. Once economists began parsing the details, though, they found that the price caps were a lot of talk and not much trousers.
Beijing’s intervention was more a threat than a promise – it was less about managing prices than managing public sentiment. In a country where the barest murmur of the words "capital gains tax" is enough to wipe a couple hundred points off the stock market, the last thing the leadership wanted were escalating concerns about escalating prices.
The situation is much the same with Beijing’s fiscal stimulus plan, unveiled in early November. The headline figure of US$586 billion is impressive, but the balloon began to deflate as soon as the economists reached for their calculators.
As the days passed, further details emerged. The central government would only stump up a quarter of the cash, with the remainder coming from provincial authorities, corporate investors and bank loans. Questions were asked as to where these three parties would get the money.
The full US$586 billion spread over two years represents annual spending equal to 8% of China’s GDP. Economists crossed off assorted physical infrastructure projects – roads, railways, airports and so on – already announced and budgeted for and whittled the figure down.
One estimate put the actual extra investment at US$190 billion, a third of the official number. Another estimate put it as low as US$90-120 billion. This would mean annual spending equal to 1-2% of China’s GDP, which is not dissimilar to the spending hike during the economic downturn of 1998-99.
So is the stimulus of 2008 in fact nothing out of the ordinary? No – at least not when seen in its true context. What the package amounts to is the crystallization of government policy discussions stretching back over several months.
With the major external contributor to GDP – exports – sinking, Beijing must rely on the pillars of the domestic economy – investment and consumption – to drive growth. However, construction has collapsed, industrial activity is down and there are concerns about consumption.
The stimulus package enables the government to show it is taking the situation seriously. Beijing is, once again, managing public sentiment. It needed to pull out a big number to boost confidence, and so that’s exactly what it did.