Boosting consumer spending is a key goal for policymakers as they flesh out China’s 4 trillion yuan economic stimulus package.
Huo Kan, Wang Changyong and Wang Jing 6 March 2009
A hefty chunk of China’s huge economic stimulus package is being spent on bricks, asphalt and whatever else goes into major infrastructure construction projects.
But a significant portion of the 4 trillion yuan spending program is targeting something better than bricks: people.
Initiatives designed to boost domestic consumer spending, health care and social security are among the key reforms attached to the stimulus outlay announced last fall by the State Council.
The economic package is expected to exert substantial influence on consumption by raising confidence in the social safety net, according to Cai Fang, a specialist at the Institution of Population and Labor Economics, Chinese Academy of Social Sciences.
Chinese consumers who see an expanded net and are convinced they’ll get government support, if necessary, in times of sickness and old age would be more willing to spend cash they now save for a rainy day, experts say.
Cai estimated that a broadening of the nation’s social security insurance program to cover the poorest 20 percent of the country’s urban residents would directly increase consumer spending by 10 billion yuan. In this way, consumption would rise even if incomes remain flat.
Officials say the strength of the social security system can affect the way consumers plan their lives and spending, while higher consumption levels can help China progress toward sustainable economic growth.
Indeed, President Hu Jintao has said that improving social welfare programs and living standards are keys to a sustainable economy.
Growth’s Impact
The two-year spending plan outlined by the State Council, China’s cabinet, calls for the central government to contribute 1.18 trillion yuan. Some 100 billion yuan was lent to infrastructure projects in the fourth quarter last year. The second batch -- 130 billion yuan –was released by the end of January.
All this new spending will increase fiscal debt. Jia Kang, director of the Research Institute for Fiscal Science at the Ministry of Finance, said the government’s budget deficit will rise sharply this year.
Caijing learned that the combined deficits of China’s central and local governments will probably reach 950 billion yuan in 2009, up from 180 billion yuan last year. Bonds will be issued to cover the shortfall, Jia said.
Banks figure into the stimulus plan as well. The government has been encouraging banks since November to open credit doors wider. In January, bank lending increased to a record-breaking 1.62 trillion yuan.
Most of the recently issued loans went toward infrastructure construction and relatively wealthy eastern regions of the country, a state-owned bank manager told Caijing.
Job Support
The people factor plays into policymaker hopes that the stimulus will create jobs. Yin Weimin, minister of human resources and social security, recently said 24 million new jobs will be needed in urban area in 2009, including positions for 6.1 million recent college graduates. Policymakers also face the challenges posed by the estimated 20 million rural Chinese who lost migrant worker jobs in recent months due to the global economic crisis.
Policymakers are pushing for an 8 percent GDP growth rate for 2009, calling that the minimum needed to prevent excessive unemployment. But many scholars doubt the stimulus package will create enough jobs to meet government goals; they say GDP growth does not necessarily improve employment.
Shen Mingao, Caijing chief economist, sees a negative correlation between fixed asset investment and the employment rate in China due to the low capital costs and foreign exchange rate control.
A study by Cai similarly found a weak correlation between GDP growth and employment. He argues, for example, that a slowing economy provides a large number of part-time and irregular jobs.
Jia suggested focusing fiscal resources on employment, while Shen said the government should create more job opportunities by encouraging openness in the service sector.
Local Governments
Meanwhile, slowing economic growth is hitting local governments hard this year. Public reports show that almost all local governments have had to lower their revenue targets for 2009. Average growth rate estimates for basic fiscal revenues – including taxes and fees -- have been at least halved in provinces and other communities across the country.
Tibet Autonomous Region is the only local government without a significant decrease in revenue growth, principally because central government transfer payments are a major revenue source.
Until recently, land transfer fees collected from developers also contributed mightily to local government revenue streams. But the real estate market has turned bearish, and the slump is expected to continue through 2009, hurting local government finances.
Nevertheless, the central government is requiring local governments to contribute a large portion of the 4 trillion yuan. The National Development and Reform Commission (NDRC) predicts local governments will offer 600 billion yuan to support key projects highlighted by the central government.
But currently local governments can afford to spend only 300 billion yuan, according to Caijing’s survey. Issues would be issued to close the funding gap. The central government plans to issue 200 billion yuan in bonds for local governments, which would pay off the credit in annual installments with interest to the Ministry of Finance.
And the central government may be counting on those instalment, since their revenues are plummeting as well, falling 17.1 percent in January alone year-on-year.
Investment Claims
Despite slumping revenues, local governments last year rushed to support the central government’s stimulus plan by declaring huge investments of their own. Caijing estimates the first 18 provinces to publicize plans announced investments worth 25 trillion yuan.
More recently, data released at local conferences in the run-up to the National People’s Congress (NPC) in Beijing in March showed a few provinces had lowered their investment targets. Currently, Caijing estimates total fixed asset investment in 2009 will exceed 20 trillion yuan -- two-thirds of the investment last year.
Actually, some of these local pronouncements may have been more talk than substance. Shen argues that many government proposals touted as new projects were already on drawing boards and cannot be counted as effective economic stimuli.
Some fear large-scale investments will drag China back to development modes that rely on heavy pollution and squander natural resources. But Chen Shihai, a National Energy Bureau official, told Caijing the central government can effectively prevent inefficient energy use. And efficient use of energy will be taken into account during performance reviews of officials responsible for projects, he said.
Crucial Consumption
Some experts say the package’s emphasis on investment will stimulate economic growth in the short-term but worsen the country’s economic structure. They point to the fact that domestic consumer spending accounted for only 50 percent of the nation’s GDP in 2008, far below the world average of 70 percent.
But Premier Wen Jiabao, in a February interview, said active steps would be taken to spur domestic consumer demand. The stimulus package calls for “accelerating the development of medical insurance, culture and education.”
Many local governments have outlined plans for boosting consumption, although few details have been released. An exception is the city of Hangzhou, which recently became the first in China to launch a consumption stimulus program by issuing coupons for a wide range of goods and services, from education programs to grocery items. The city government issued coupons worth 200 million yuan, and as of late February some 65 million yuan had been spent.
A jump-start for health care spending was expected from the NPC, which was expected to approve a health insurance reform plan. Under the plan, all levels of government could invest a combined 850 billion yuan between this year and 2011 – an amount that Caijing learned is not counted in the 4 trillion yuan stimulus package.
In addition, a new measure aimed at boosting social security, the draft of which has been released for public opinion, would provide comprehensive coverage for all urban and rural residents.
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Can Stimulus Light China’s Consumer Fire?
Boosting consumer spending is a key goal for policymakers as they flesh out China’s 4 trillion yuan economic stimulus package.
Huo Kan, Wang Changyong and Wang Jing
6 March 2009
A hefty chunk of China’s huge economic stimulus package is being spent on bricks, asphalt and whatever else goes into major infrastructure construction projects.
But a significant portion of the 4 trillion yuan spending program is targeting something better than bricks: people.
Initiatives designed to boost domestic consumer spending, health care and social security are among the key reforms attached to the stimulus outlay announced last fall by the State Council.
The economic package is expected to exert substantial influence on consumption by raising confidence in the social safety net, according to Cai Fang, a specialist at the Institution of Population and Labor Economics, Chinese Academy of Social Sciences.
Chinese consumers who see an expanded net and are convinced they’ll get government support, if necessary, in times of sickness and old age would be more willing to spend cash they now save for a rainy day, experts say.
Cai estimated that a broadening of the nation’s social security insurance program to cover the poorest 20 percent of the country’s urban residents would directly increase consumer spending by 10 billion yuan. In this way, consumption would rise even if incomes remain flat.
Officials say the strength of the social security system can affect the way consumers plan their lives and spending, while higher consumption levels can help China progress toward sustainable economic growth.
Indeed, President Hu Jintao has said that improving social welfare programs and living standards are keys to a sustainable economy.
Growth’s Impact
The two-year spending plan outlined by the State Council, China’s cabinet, calls for the central government to contribute 1.18 trillion yuan. Some 100 billion yuan was lent to infrastructure projects in the fourth quarter last year. The second batch -- 130 billion yuan –was released by the end of January.
All this new spending will increase fiscal debt. Jia Kang, director of the Research Institute for Fiscal Science at the Ministry of Finance, said the government’s budget deficit will rise sharply this year.
Caijing learned that the combined deficits of China’s central and local governments will probably reach 950 billion yuan in 2009, up from 180 billion yuan last year. Bonds will be issued to cover the shortfall, Jia said.
Banks figure into the stimulus plan as well. The government has been encouraging banks since November to open credit doors wider. In January, bank lending increased to a record-breaking 1.62 trillion yuan.
Most of the recently issued loans went toward infrastructure construction and relatively wealthy eastern regions of the country, a state-owned bank manager told Caijing.
Job Support
The people factor plays into policymaker hopes that the stimulus will create jobs. Yin Weimin, minister of human resources and social security, recently said 24 million new jobs will be needed in urban area in 2009, including positions for 6.1 million recent college graduates. Policymakers also face the challenges posed by the estimated 20 million rural Chinese who lost migrant worker jobs in recent months due to the global economic crisis.
Policymakers are pushing for an 8 percent GDP growth rate for 2009, calling that the minimum needed to prevent excessive unemployment. But many scholars doubt the stimulus package will create enough jobs to meet government goals; they say GDP growth does not necessarily improve employment.
Shen Mingao, Caijing chief economist, sees a negative correlation between fixed asset investment and the employment rate in China due to the low capital costs and foreign exchange rate control.
A study by Cai similarly found a weak correlation between GDP growth and employment. He argues, for example, that a slowing economy provides a large number of part-time and irregular jobs.
Jia suggested focusing fiscal resources on employment, while Shen said the government should create more job opportunities by encouraging openness in the service sector.
Local Governments
Meanwhile, slowing economic growth is hitting local governments hard this year. Public reports show that almost all local governments have had to lower their revenue targets for 2009. Average growth rate estimates for basic fiscal revenues – including taxes and fees -- have been at least halved in provinces and other communities across the country.
Tibet Autonomous Region is the only local government without a significant decrease in revenue growth, principally because central government transfer payments are a major revenue source.
Until recently, land transfer fees collected from developers also contributed mightily to local government revenue streams. But the real estate market has turned bearish, and the slump is expected to continue through 2009, hurting local government finances.
Nevertheless, the central government is requiring local governments to contribute a large portion of the 4 trillion yuan. The National Development and Reform Commission (NDRC) predicts local governments will offer 600 billion yuan to support key projects highlighted by the central government.
But currently local governments can afford to spend only 300 billion yuan, according to Caijing’s survey. Issues would be issued to close the funding gap. The central government plans to issue 200 billion yuan in bonds for local governments, which would pay off the credit in annual installments with interest to the Ministry of Finance.
And the central government may be counting on those instalment, since their revenues are plummeting as well, falling 17.1 percent in January alone year-on-year.
Investment Claims
Despite slumping revenues, local governments last year rushed to support the central government’s stimulus plan by declaring huge investments of their own. Caijing estimates the first 18 provinces to publicize plans announced investments worth 25 trillion yuan.
More recently, data released at local conferences in the run-up to the National People’s Congress (NPC) in Beijing in March showed a few provinces had lowered their investment targets. Currently, Caijing estimates total fixed asset investment in 2009 will exceed 20 trillion yuan -- two-thirds of the investment last year.
Actually, some of these local pronouncements may have been more talk than substance. Shen argues that many government proposals touted as new projects were already on drawing boards and cannot be counted as effective economic stimuli.
Some fear large-scale investments will drag China back to development modes that rely on heavy pollution and squander natural resources. But Chen Shihai, a National Energy Bureau official, told Caijing the central government can effectively prevent inefficient energy use. And efficient use of energy will be taken into account during performance reviews of officials responsible for projects, he said.
Crucial Consumption
Some experts say the package’s emphasis on investment will stimulate economic growth in the short-term but worsen the country’s economic structure. They point to the fact that domestic consumer spending accounted for only 50 percent of the nation’s GDP in 2008, far below the world average of 70 percent.
But Premier Wen Jiabao, in a February interview, said active steps would be taken to spur domestic consumer demand. The stimulus package calls for “accelerating the development of medical insurance, culture and education.”
Many local governments have outlined plans for boosting consumption, although few details have been released. An exception is the city of Hangzhou, which recently became the first in China to launch a consumption stimulus program by issuing coupons for a wide range of goods and services, from education programs to grocery items. The city government issued coupons worth 200 million yuan, and as of late February some 65 million yuan had been spent.
A jump-start for health care spending was expected from the NPC, which was expected to approve a health insurance reform plan. Under the plan, all levels of government could invest a combined 850 billion yuan between this year and 2011 – an amount that Caijing learned is not counted in the 4 trillion yuan stimulus package.
In addition, a new measure aimed at boosting social security, the draft of which has been released for public opinion, would provide comprehensive coverage for all urban and rural residents.
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