China Announces Stimulus Package

The People's Republic of China has announced an economic stimulus package of its own, amounting to almost $600 billion. The government will spend it on housing, earthquake reconstruction, and infrastructure development. In addition, the powers that be have promised an eased monetary policy and lower corporate taxation. The Chinese economy is still steaming along at a 9% annual growth rate, and the package is designed to counteract lessened demand for Chinese goods abroad.

In announcing the package,  Premier Wen Jiabao said, 'Facing the current severe external and domestic conditions our top task is maintaining steady and relatively fast economic growth and avoiding big booms and busts. The most important thing is to strive for ways to improve residents' incomes and increase their consumption . . . . China needs to implement measures that spur reasonable housing demand, help the development of modest-priced houses, and stimulate the development of secondary market transactions and the housing rental market.”

Bloomberg reports, “The government will also allow tax deductions for purchases of fixed assets such as machinery to stimulate investment, a move that will reduce companies' costs by an estimated 120 billion yuan. Grain purchase prices and subsidies for farmers will be raised, along with allowances for low-income urban households. The government also said it had scrapped loan quotas, which limited lending by banks, to help small businesses.”

Dominique Strauss-Kahn, managing director of the International Monetary Fund, told Reuters, “It's a huge package will have an influence not only on the world economy in supporting demand but also a lot of influence on the Chinese economy itself, and I think it is good news for correcting imbalances.”

China has begun the process of switching from an export-led developing economy to being a developed economy that consumes more of its own production. If its economy were to slow down much, the rising middle class in China would slip back toward poverty. That would in turn create the kind of political instability that terrifies the Communist Party.

Outside China, the package is significant because China accounted for 27% of global economic growth last year, according to International Monetary Fund estimates. Several Asian countries depend on China for their own continued development. It used to be said that when America sneezed Europe caught cold – the same is now true of China and its Asian trading partners.



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