china’s stimulus package a six-month report...

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China’s stimulus packageA six-month report card

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© Economist Intelligence Unit 2009 1

Contents Executive summary 3

1. Why is the government proceeding in this manner? 6 Late1990s:Beijing’sformativeexperience,theAsianfinancialcrisis 6 2007toearly2008:Astheglobaleconomyweakened,Chinareversedpolicy 7 Mid-2008tolate2008:Beijinglistens,andacts 7 Late2008topresent:Spendingone’swaytogrowth 8

2. What is in the package? 9 Sectoralbreakdownandfocus 10

3. How will this be managed? 11 Sortingthroughthewish-lists 11 Ministries 11 Considerationandapproval 11 Oversight 12 Specialinterests 12

4. How will it be funded? 13 Theoriginalplan 13 Thebanks 13

5. A budgetary challenge 14 Problemswiththebudget 14 Nationally 14 Provincially 15

6. More forms of relief 16 Ruralfinances 16 Taxrelief 16 Subsidies 16 Controlslifted 16 Reversalofmonetaryandfiscalmeasures 17 Taxrebates 17 Housingassistance 17 Andsoon 18

7. Where will it go? 19 Industrialrestructuring 19 Innovativetechnology 20

8. How has it actually been funded? 21 Focus box 21 Case study:Specificallocationsfor2ndtrancheofcentralgovernmentfunding 21 Thebanks 22

9. Our assessment 23 Beijingvs.theprovinces 24 Allocationsinbatchesandtolocalities 25 Localinitiatives—another“GreatLeapForward”? 26 Case study:Property—anexclusionzone 27

10. Our concerns 28 Aherdofwhiteelephants? 28 Focus box:Disclosureofgovernmentinformation 29


2 © Economist Intelligence Unit 2009

Disclaimer

©2009EconomistIntelligenceUnit.Allrightsreserved.Allinformationinthisreportisverifiedtothebestoftheauthor’sandthepublisher’sability.However,theEconomistIntelligenceUnitdoesnotacceptresponsibilityforanylossarisingfromrelianceonit.

Neitherthispublicationnoranypartofitmaybereproduced,storedinaretrievalsystemortransmittedinanyformorbyanymeans,electronic,mechanical,photocopying,recordingorotherwise,withoutthepriorpermissionoftheEconomistIntelligenceUnit.

Acknowledgements

ThisreportwasresearchedandwrittenbyWuChen.ThecontributingeditorswereDuncanInnes-KerandVictoriaLai.MaryBoydwasthemanagingeditor.

July 2009



Executive summary

The so-called Rmb4trn stimulus package is more a policy than a packageChina’sresponsetotheeconomiccrisishasgonefarbeyondthespecificexpenditureincludedintheRmb4trnstimuluspackageannouncedinthenationalcapital,Beijing,onNovember9th2008.ThepolicycontextthathasshapedChina’sreactionhasitsrootsinatraditionofstate-ledeconomicdevelopment,aswellasinexperiencegainedduringtheAsianfinancialcrisisof1997-98.ThephasesofthecurrentstimuluspolicycomprisemonetarypolicyadjustmentssuchasVAT(value-addedtax)rebatesandinterestratecuts,acoreinvestmentplan,fundingmechanisms(banksloans,provincialbonds)andaseriesoftemplatesforindustrialrestructuring.Thesequencingofthesesegmentshasnotonlybeeninresponsetoglobaleconomicconditions,buthasalsobeentailoredbydomesticpoliticalrealities.

• Details are still fuzzy.MuchofthescopeandmanyofthedetailsoftheRmb4trnstimuluspackagearestillopaque.Thetwo-yearspendingprogrammeisintertwinedwithinvestmentprojectsfromthe11thfive-yearplan,whichbeganin2006.Thecentralgovernmentisalsofine-tuningitseffortonanear-dailybasis.SinceNovember,ithasintroducedseveralmajorpolicyinitiatives,suchasthe“tenindustriesrevitalisationplan”andtheblueprinttoturnShanghaiintoaninternationalshippingandfinancialcentre.

• Main problems are left unaddressed. ThestimuluspackagedoesnotaddresstheunderlyingproblemsintheChineseeconomy.OfthethreepillarsofeconomicgrowthinChina—trade,investmentandconsumption—exportswillcontinuetofalteruntiltherecoveryofChina’smajortradingpartners,theUSandEU.Despiterecentfigurespaintingarosypictureofretailgrowth—nationwide,retailsalesgrewby15%intheJanuary-April2009period—domesticconsumptionwilltakealongtimetocompensatefortheslumpinexports.Indeed,higherlevelsofdomesticconsumptionwillrequiregreatergovernmentinvestmentinsocialwelfare,whichstillaccountsforonlyafractionof2009governmentfiscalspendingandoftheentiretwo-yearfiscalstimuluspackage.Fixedassetinvestment,ontheotherhand,hasbeenincreaseddramatically,owingtothegovernment’spromotionofinfrastructureprojects,rangingfromelevatedhigh-speedrailwaystoregionalairports.However,corporateinvestment,fromprivateenterprisesaswellasfromstate-ownedenterprises(SOEs)andmultinationalcorporations,hasbeencutbackdramaticallybecauseexcesscapacityinthemanufacturingsectorwilltakemonths,ifnotyears,tobefullyutilised.Moreover,althoughthecentralgovernmentistryingtospenditswayoutofthecrisisbypushingupfixedassetinvestment,ithasnotaddressedtheissuesoflacklustredomesticdemandorunemployment—eitherofthemorethan20mmigrantworkerslaidofffromexportmanufacturingassemblylines,orofthemorethan5mrecentcollegegraduateswhohavebeenunabletofindwork.

Thereisalsotheissueofstructuraleconomicreform.In2006Chinabegantomoveupthevaluechaininthemanufacturingsectorwiththe“emptythecage,changethebirds”initiative(騰籠換鳥)



inGuangdong,thethenmanufacturingheartland.Thispolicyencouragedcompaniestoexitshrinkingmarketsandupgradetohigher-value-addedmanufacturing.ThiswasfollowedinJanuary2008bytheintroductionoftheLabourContractLaw,whichmandatedwrittencontractsforworkersandincreasedprotectionforconditionsofemployment.However,bothpolicieshavebeensetbackbythefinancialcrisis,ascompanies(especiallylabour-intensivemanufacturers)haveparedcostsandstaffnumberstosurvive.

• Lack of transparency in process.Thestimulusplanitselfhascertaininherentshortcomings.Itsdirection,deliberationprocesses,andspecificrationalesbehindtargetedareasandfundingallocationsalllacktransparency.And,likeallcentralgovernmentspending,ithascreatedampleopportunitiesforinterestgroups,ledbypowerfulministriesandcompetingprovinces,forself-servingbehaviour.

• Questionable accounts.Theaccountsledgersworrymanyobservers.Asofmid-May2009,thecentralgovernmenthasreleasedRmb304bn,or25%ofitspromisedshareofRmb1.18trninfunding.However,newbanklending,muchofitdirectedtowardsgovernment-guaranteedinfrastructureprogrammes,wasRmb5.17trninthefirstfourmonthsof2009.Localgovernmentshavealsocompetedwithoneanotherwiththeirowninvestmentschemes.TheinlandmunicipalityofChongqingboastsofplanningfixedassetinvestmentofRmb500bnthisyear,andthepoorcoastalprovinceofGuangxiplanstospendRmb600bn.Howthesetwolocalitieswillfinancealltheseadditionalprojectsisnotyetclear.Insomeinstances,localgovernmentsintendtoparticipateintheprovincialbondissuanceprogramme,whichisnowoperatingonaprovisionalbasisinseveralareas.Otherlocalitiesareeyeingmoremassivebankloans.

• Dubious projects. Someoftheinfrastructureprojectsthemselvesaredubious.PosterprojectssuchastheRmb40bnShanghai-Nanjingintercityexpressrailway,ortheRmb72.6bnHongKong-Macao-Zhuhaibridge,purporttogeneratesocialandeconomicbenefits,butraiseconcernsoverwhethertheywillmerelybevanityprojectsthatwillonlybenefitsteelandcementmakers.Criticshavealsoquestionedtheduplicativenatureofprojects:theShanghai-Nanjingintercityexpressrailwayandthehigh-speedexpressrailwaybetweenShanghaiandBeijingwillhave300kmofoverlappingroutes.

• Problems with rent seeking.Theimplementationofthestimuluspackagerisksmassiverentseeking.Initialauditshavealreadyunveiledproblemssuchasinadequateinitialfundingorduplicativeconstruction.Therehavealsobeencasesoflocalgovernmentsfakingdocumentationorevenfakinganentireprojecttogarnerfunding.Otherconcernsincludespeculativecommercialpaperdiscounting,fundingdelaysandinsufficientstimulusforsmallandmedium-sizedenterprises(SMEs).

• Rural land reform. Finally,althoughthereareprovisionsthathelpruralhouseholdstopurchaseconsumergoods,thereisnothinginthestimuluspackagethattouchesontheissueofrurallandreform,whichhasthepotentialtotransformtheruraleconomyandaccelerateurbanisation.DraftlegislationonrurallandtransferswasintroducedinOctober2008,butsincethenthecentralgovernmenthasbeensilent.Althoughitisunderstoodthatadministrativepreparationsforlandregistrationandthelikeare



complicated,thereisconcernthatthegovernmenthasrolledbackitsoriginaltimetableforrurallandreformowingtopreoccupationwiththestimuluspackage.

Nonetheless,despiteallthesemisgivings,thecentralgovernmentshouldbegivencreditforitspromptresponsetothefinancialcrisis,itseffortstoselecttargetsanditscapabilitiestofine-tunetheinvestmentprocess.Severalmajorindicatorsshowthatthestimuluspackagehasalreadybeeneffectiveinpreventingtheeconomyfromslowingdownfurther,andcertainlythereareparallelsbetweenincreasedratesoffixedassetinvestmentandeconomicgrowth.AccordingtotheNationalBureauofStatistics,China’seconomyexpandedby7.1%inthefirsthalfof2009,withGDPgrowingfrom6.1%inthefirstthreemonthsoftheyear,andthenacceleratingto7.9%growthinthesecondquarter.Investmentwasthemainforcebehindtheacceleration,asthegovernment’sloosecreditpolicyandstimulusspendingsupportedinfrastructureconstruction.Fixedassetinvestment(FAI)roseby33.5%yearonyearinJanuary-June,upfrom28.8%inthefirstquarter,withFAIineastern,centralandwesternregionsincreasingby26.7%,38.1%and42.1%respectively.



1. Why is the government proceeding in this manner?

Late 1990s: Beijing’s formative experience, the Asian financial crisis

ThelessonslearntfromtheAsianfinancialcrisisin1997-98haveshapedmanyofthegovernment’sresponsestothecurrentfinancialdownturn.Whatthegovernmentlearntin1997wasthatitcould

spenditswayoutofdanger,andthatitcouldleverageglobalweaknessintonationaladvantage.However,itfailedtolearnhowtostimulatedomesticconsumptionandhowtoensurethatfiscalspendingtricklesdowntosmallandmedium-sizedenterprises.

InJuly1997devaluationoftheThaibahtresultedinacascadeofcurrencydevaluationsandeconomiccrisesthroughoutAsia.WhiletherenminbiremainedpeggedtotheUSdollar,Chinatookanunprecedentedactiveroleinprovidingeconomicstabilityintheregion,throughgrantsandloanstoaffectedgovernmentsviamultilateralchannels—suchastheIMF,APEC(Asia-PacificEconomicCooperation)andASEAN(AssociationofSouth-EastAsianNations)—andbilateralassistance.Inthedecadesincethen,ChinahasstrengtheneditsrelationshipsintheASEANregionthroughafree-tradeagreement.Chinaalsobeganamajordomesticinfrastructuredrivetoensureahighdegreeofeconomicactivity.Muchoftheinfrastructurebuiltinthelate1990swasforroadsandhighways,whichinturnopenedupinteriorregionstomorecommerce.ThiswasfollowedinJanuary2000withtheestablishmentofa“leadershipgroupforwesternChinadevelopment”(西部地區開發領導小組)undertheStateCouncil(China’scabinet),whichhascontinuedfundingdevelopmentprojectsinthewesternprovinces.

MuchcurrentacademicdiscussioninChinarevolvesaroundthesimilaritiesbetweenthe1997stimulusandthe2009version.Intheearlierstimuluspackage,localgovernmentsinvestedmorethanexpected,partlytofulfiltargetssetbythecentralgovernment,andpartlyowingtotheirvestedinterestsinprojectaccumulationandgrowth.From1998to2001,thecentralgovernmentplannedtoissueRmb100bninbondstofinanceprojectsvaluedatRmb1.3trn.However,thefinaltallywasgovernmentissuanceofRmb800bnworthofbonds,tofinanceprojectsworthRmb2.4trn.

State-ledinvestmentplayedaleadingroleinrevitalisingtheeconomyin1997,andthesameistruetoday.However,therearealsosomesignificantdifferences.First,thescaleofthepresentcrisisisfarlargerthaninthe1990s,andtheChineseeconomynowisfarmoreintegratedwiththeglobaleconomy.Moreover,centralauthoritiesmadeacrucialdecisioninthe1997-98crisistoacceleratethederegulationofthepropertymarket.Earlierpilotprogrammestoprivatisehomeownershiphadbeenunderwaysincetheearly1990s,buttheseprogrammeswereexpandedin1998,resultinginanenormousboosttoresidentialpropertydevelopmentandusheringinmajorsocialchange.Sincethen,theconstructionandpropertysectorshavebecomeso-calledpillarindustriesinChina,creatingmillionsofjobsandahugemarket—aswellashugefortunesforlandspeculatorsandpropertydevelopers.

Anothercrucialsectorthatwasderegulatedinthelate1990swashealthcare.Whilethisundoubtedly



ledtothegrowthoflocalbio-pharmaceuticalcompaniesandmedicalcare,privatisationalsoplacedhealthcareoutofaffordablereachformany.Thusthelegacyfromthe1997/98stimuluspackagewasmixed:alongwiththeinter-provincialhighwaysystemandnewspatiallivingpossibilities,the1997/98stimulusalsogeneratedhighhousingpricesandinordinatelyexpensivehealthcare.Anadditionalnegativeconsequenceofincreasedliquiditywasspeculativeinvestment,asvariousinvestmentscams(includingpyramidschemes)rockedChinain1998and1999.Mostsignificantly,domesticconsumptionfailedtogrow.Consumerswereworried(astheystillare)bytherisingcostsofhousing,healthcareandeducation,andstubbornlystucktofrugality,maintaininghighsavingsrates.

2007 to early 2008: As the global economy weakened, China reversed policyChina’sGDPgrewby13%in2007,andthecountry’spolicymakersspentmuchofthatyearworryingabouttheeconomyoverheating.ChinahadreducedorabolishedtheexporttaxrebatesformanycommoditiesinJune2007inordertoreduceitstradesurplus.InearlyNovember2007,thePeople’sBankofChina(PBC,thecentralbank)imposedamoratoriumonlendingbybothdomesticandforeignbanks,asthePBC’syearlyquotaofloans(Rmb3.63trn)hadbeenexceeded.AlthoughbanklendingresumedinJanuary2008,creditcontinuedtobesqueezedbyaseriesofinterestratehikesandincreasesinthereserveraterequirementforbanks(whichhadrisento17.5%).

InChina,theexportsectorfirstfelttheimpactofglobalcontraction.Specificchallengesforexportersinthefirsthalfof2008includedrenminbiappreciation(by6.5%atmid-year),inflation,productsafetyscandals(particularlyfortoymanufacturers),reducedexporttaxrebates,risingwagebillsandpolicydirectivestoupgradeindustrialprocessing—allofwhichsqueezedthemarginsofmanyexportmanufacturers,particularlysmallerenterprises.AccordingtotheNationalDevelopmentandReformCommission(NDRC),over67,000SMEs(includingover10,000textilemanufacturers)wereforcedtocloseinthefirsthalfof2008.Guangdong—amajorbaseforlow-cost,labour-intensivemanufacturingandChina’stopexportingprovince—wasespeciallyhardhitbyrisingcostsandthedownturninexportorders.

Mid-2008 to late 2008: Beijing listens, and actsInthethirdweekofJuly2008,theCentralLeadingGroupofFinancialandEconomicAffairswithinthepolitburometforananalysisoftheimpactofeconomictighteningmeasuresontheexportsector,followinginspectiontourstothemainexportingprovincesearlyintheyearbyChina’spremier,WenJiabao,andthepresident,HuJintao.TheresultingdecisionbytheCentralLeadingGroupwastorelaxtheeconomictighteningmeasureswhichhadbeeninplaceforseveralmonths,throughadjustmentstocreditprovisionandexporttaxrebates,citingtherequirementtomaintain“stablebutrapideconomicgrowth”whilecontaininginflation.

InlateJuly2008theStateAdministrationforTaxationannouncedadjustmentstothetaxrebatesystemforexporters,notablyforlabour-intensivemanufacturing.Inasofteningofitstightmonetarypolicy,thePBCannouncedinearlyAugust2008thatitwasraisingthelendingquotasforbothdomesticandforeignbanks:nationalbanksweretohavea5%increase,andlocalcommercialbanksweretoreceive



a10%increase.ThePBCfurtherinstructedthattheadditionallendingquotabedirectedtowardsSMEs,theagriculturalsectorandreconstructionworkintheearthquakezone.

Inthefollowingmonths,furtherexporttaxrebatesandexportduties(notablyonsteelandchemicalproducts)wereadjustedtoencourageexportsales,withtheStateCouncilannouncinginmid-Novemberthatitwouldraiseexporttaxrebateson3,770exportitems(representing28%ofexports,withaconcentrationonmachinery,electricalproductsandlabour-intensiveproducts),effectiveDecember1st.ThismeasurefollowedapreviousrelaxationofexporttaxeswhichtookeffectonNovember1st.OthercorporatetaxreliefpermittedthedeductionofVATonfixed-assetpurchases,andwasintendedtohelpthepurchaseofnewequipment.Inthefollowingmonths,furtherannouncementsoftinkeringtorelievepressureonspecific(usuallylabour-intensive)industrieshavebeenrolledout,intheformoftaxcutsandadjustmentstoexporttaxrebates,inacontinuous“paralleltrack”ofassistancetobusinessrecovery.

Late 2008 to present: Spending one’s way to growthThebankruptcyofaninvestmentbank,LehmanBrothers,inmid-September2008andthepanicresultingfromthefearedcollapseofagiantinsurancefirm,AIG,inthefollowingweeksaddednewurgencytogovernmentresponses.China’smostnoteworthydefensivemeasureagainsteconomiccontractionwasrevealedonNovember9th,withtheannouncementofanRmb4trnstimuluspackagetorununtil2010,comprisinginfrastructureinvestmentsandredistributivesocialspending.Thetimingoftheannouncementwasnoteworthy,asthepresident,HuJintao,wasscheduledtoattendtheG20summitinWashingtonDConNovember14th,andwasthereforeabletoannounceChina’sstimulusspendingasafaitaccompliatthemeeting,notingthatensuringChina’sgrowthwasthemostsignificantcontributionhisnationcouldmaketowardsglobaleconomicrecovery.



2. What is in the package?

Whatisincludedinthestimuluspackageandwhathasbeenleftout?Thestimuluspackagefromthestartwaspositionedasaconfidence-buildingmeasure,ratherthanafully-formedprogramme

ofspending(suchasthefive-yearplan),althoughtherhetoricusedtodescribethepackageresonatedwithothergovernmentmessages.Accordingtothepremier,WenJiabao,theRmb4trnstimuluspackageonlyconstitutesone“pillar”oftheoverallgovernmentrescueplan,andcomprisesinfrastructureandprojectscloselyrelatedtopeople’slivelihood,suchasenvironment,educationandhealthcare.Theotherthreepillarsaretherevitalisationplanfortenmajorindustries;supportforscienceandtechnology;andimprovementstothesocialsecuritysafetynet.

WhiletheRmb4trnstimuluspackageisonlypartofanoverallplantoboostgovernmentspending,therearesomecleardistinctionsregardingproposedincreasesingovernmentspendingandinvestment.Thecentralgovernmenthasoutlinedspecifictargetareasandguidelinesforinvestmentinthestimulusschedulefromend-2008toend-2010,butatthesametimebothcentralandlocalgovernmentsaresplashingoutonotherinvestmentprojectsthatlieoutsidetheRmb4trnframework.

Broadlyspeaking,thestimulusprojectsannouncedtodatefallintothefollowingcategories:

• 11-plus:Theseprojectsrepresentnonewadditionalspendingbutareratheranaccelerationofspendingthathasalreadybeenproposedandallocatedinthe11thfive-yearplan.Theseprojectshavecompletedfeasibilitystudiesandhavebeenallocatedfunding,sothestimuluspackageservestoacceleratefundingdisbursementsandthusthepaceofprojectcompletion.Oneexampleisthe900-kmexpressrailwaybetweenHarbinandDalian,whichhadbeenapprovedbytheNDRCin2005asamajor11thfive-yearplanconstructionprojectwithanestimatedinvestmentofRmb82bn.ConstructionstartedinOctober2007andwastobecompletedin2013.Largelyowingtothestimulusplan,thecompletionhasbeenbroughtforwardto2011.Variousmetrorailprojectsin11citieshavealsobeenfast-trackedfromtheiroriginalfive-yearplanschedules—theseincludethemunicipalitiesofBeijing,Shanghai,ChongqingandTianjinaswellasseveralprovincialcapitals(Shenyang,Xi’an,ChengduandGuangzhou)pluscommercialcentres(Shenzhen,DalianandNingbo).ThetotalbudgetfortheirconstructionisestimatedtobeRmb171bn.

• Harmonious society:Theseareprojectsfundedbythecentralgovernment(withsomeco-fundingfromlocalgovernments)andrelatetolivelihoodsupportandredistributivesocialspending,suchashealthcarereformandmeasurestoincreaseruralincomeandaugmentsteachers’salaries.Theseprojectsareinaccordancewiththe“harmonioussociety”principlesoriginallyoutlinedbyHuJintaoinhisfirstadministration(2001-06)andwhichhavesincebecomethehallmarkofhissocialpolicy.

• Tax relief:TheseareadditionalfiscalmeasuresannouncedseparatelyfromtheRmb4trnstimuluspackage,aswellastaxwaiversandreductionswhichbenefitspecificindustries,suchasreducedsalestaxesforsmall-enginecarsandincentivesforruralhouseholdstobuyelectricalappliances.

• Industrial revitalisation strategies:Todate,industrialrestructuringblueprintshavebeenunveiledfortenindustries—someoftheseblueprintshaveatimelineoftwoyears,whileothershavealongerimplementationschedule.Notablemeasuresfromtheblueprintsusuallyincludetaxrelief,provisionof



credittoupgradetechnologyandimproveenergyefficiency,encouragementofindustrialconsolidationthroughmergersandacquisitions,andtheexpansionofruralmarketsandexportsales.Thetenindustriesare:automotives;steel;textiles;shipbuilding;petrochemicals;non-ferrousmetals;equipmentmanufacturing;informationtechnology(IT);lightindustryandlogistics.

Sectoral breakdown and focusThegovernment’smainfocusforspendingfromthestimuluspackageisonmega-projects,primarilyonlarge-scaleinfrastructurecivilworksaswellasforthereconstructioneffortforpost-earthquakeSichuan.Ofthecivilengineeringprojects,railwayconstructionaccountsforalargepercentageofprojects,includingover8,000kmofhigh-speedrailwaylines.Thesemassiveprojectswillincreasedemandforcement,steelandotherconstructionmaterialswhichhavebeenhitbytheeconomicslowdown.

Indeed,themainfunctionofthefundingstimulusistoincreasedemandforsuchitems,andthuskick-starttheeconomy.Governmentinvestmentisdesignedtoactas“seedfunding”toattractfurtherinvestment,fromco-fundingfromlocalgovernmentsaswellasfromprivateinvestment(withthehelpofmassivebanklending).Thegoalistoincreasethemultipliereffect,whichisusuallycalculatedata1:3ratioforco-funding.However,ifoverheatingresults,themultiplicationcouldrapidlysurpassthistarget.Thequestioniswhetherthecentralauthoritieswillbeabletocontrolthepaceofprojectgrowth,andwhetherthegovernmentwillbeable(orwilling)toreinininvestmentsoastoavoidthegrowthofspeculativebubbles.

The targeted areas include: Rmb

Low-costhousingforlow-incomecitizens 400bn

Majorinfrastructureprojects,suchasrailways,highways,airportsandpowergrid 1.5trn

Rurallivelihoodandinfrastructureimprovement 370bn

Ecologicalandenvironmentalprojects 210bn

Projectsaimedat“indigenousinnovation”reform 370bn

Healthcareandeducationprojects 150bn

Sichuanearthquakereconstruction 1trn



3. How will this be managed?

Sorting through the wish-lists

Notsurprisingly,thegovernment’sannouncementofthestimuluspackageonNovember9thstartedaflurryofbureaucraticeffortatalllevelsofgovernment.Initialpost-November9thgovernment

statementsfocusedonspecificsectors,notingthattheproposedinfrastructurebuild-outincludedenergyandtransportation.However,thebureaucraticcommotionintensifiedwiththecentralgovernment’sdecisiontoallocateRmb100bnamong11ministriesbytheendofthefirstquarterof2009,withspendingplansscheduledtoberatifiedduringthespringsessionoftheNationalPeople’sCongress(China’slegislature).

MinistriesInlieuofotherguidance,earlyindicationswerethatcarteblanchewouldbegiventoministriestopromotestrategicprogrammesandtoexpandoraccelerateongoinglong-termprojects,suchastheSouth-Northwaterdiversionprojectandreformstoforestrymanagement.Mediacoveragepaidparticularattentiontoongoinginfrastructureinvestmentsthatwereexpectedtoyieldearlierreturnsforeconomicgrowthintheenergysector.TheseincludedagaspipelinetoGuangdongandtheexpansionofexistingandconstructionofnewnuclearandhydropowerplants.Afullsuiteofairportexpansionwasalsoannounced,toincreasethecapacitiesofmajorhubairports(Shanghai,Chengdu,Xi’anandGuangzhou)aswellasregionalairportsandnewairlinkstoruralcommunities.Urbanrailtransportwastobeexpanded,throughsubwayandlightraillinksinfifteenmajorcities.

However,underneathalltheoftenbreathlessinitialmediacoverageofthefiscalstimuluspackage,theprovenanceoffundingwasunclear—centralauthoritiesappearedtobeinjectingRmb2.5trnofnewspending,buttheremainderofthefundsseemedtobeeitheralreadycommittedunderthe11thfive-yearplan(whichcoincidentallyrunsuntil2010andwhichincludesanumberofmega-projects,suchastheSouth-Northwaterdiversionprojectaswellasthemetrorailprojectsin11cities),orwouldbematchedbyprovincialandlocalgovernmentfunding.

Consideration and approval Asthespendingguidelinesforthesectorsandprojectsweregraduallyunveiled(includingcompensatoryquotastoredressregionalandpopulationdisparities)theyhavebeencloselystudiedbyprovincialandmunicipalofficials,usuallyintheformofa“smallgroup”taskforceconvenedbytheprovincialpartysecretaryandincludingseniorcivilianofficials(governorandmayors).Themaindutyofaprovincial-leveltaskforcehasbeentocollateandbundleallappropriateprojectsforconsideration.Therearecertainprerequisitesforapproval:projectsneedtobeinlinewithgovernmentdirectives,andtheymusthavecompletedpreparationworkandfeasibilitystudies.Theyalsoneedtodemonstratethattheyhavetheabilitytoraiseasignificantportionofinvestmentinmatchingfunds.Inaddition,theStateCouncilhasfinalapprovaloverprojectsrequiringaninvestmentlargerthanRmb200m.



Oncethesmallgroupattheprovincialleveldevelopeditswishlistofprojectsfortheprovince(carefullyphrasedsoastofiteasilyintotheprojectguidelines),thelocalDevelopmentandReformCommission(DRC)thentransferredthelisttotheNationalDevelopmentandReformCommission(NDRC).ItshouldbenotedthatwhiletheDRCofficialsattheprovincialandsub-provinciallevelsreporttotheNDRC,theirsalariesareinfactpaidoutofprovincialcoffers,sotheyarebynomeansdisinterestedpartiesinthisprocess.

TheNDRChasthejobofsortingthroughalltheprovincialsubmissions,callinginotherministriesforconsultationasrequired.OncetheNDRChasapprovedtheprovincialprojects,itallocatesfundingenbloctotheprovincial-levelMinistryofFinanceofficefordisbursementtothespecificgovernmentbureausthatwillberesponsibleforprojectmanagement.TheleadingroleplayedbytheNDRChasresultedinapunontheChineseidiom跑步前進(“runtogetahead”,whichhasbecome跑部錢進or“runintoministriestograbmoney”).HotelsaroundtheNDRCofficebuildingshavebeenfullybookedeversinceNovember.

OversightIntheweeksafterNovember9th,theinitialRmb4trnallocationannouncedbytheStateCouncilunderwentsomeclarification,aswellasmuchaugmentation.Deadlineswereintroducedforatleastsomeofthefundingrequests,andauditingprocedureswerehighlightedinmediacoverage.OversightandauditingaretheresponsibilitiesoftheMinistryofFinance(atthecentralandprovinciallevels)andtheNationalAuditOffice.TheCentralCommissionforDisciplineInspectionoftheChineseCommunistPartyhasalsostateditsintentiontoscrutiniseallgovernmentallocationsoftheRmb4trn.

Special interestsNotsurprisingly,thestimuluspackagebeganacquiringan“adhesive”quality,inthatothergovernmentinitiativesrapidlybecameassociatedinthepublic’smindwiththepackage.Additionalmeasures(independentoftheRmb4trnstimuluspackage)hadalreadybeenintroducedtohelpthesaggingpropertysector.ThestampdutyonhomepurchasesandVATonlandsaleswereliftedonNovember1st,andmortgagelendingwaseasedthroughlowerdown-paymentrequirements(to20%from30%)andlowerinterestrates.TheMinistryofHousingandUrban-RuralDevelopmenthadannouncedthatitwouldspendRmb900bnonhomeconstructionandrenovationforlow-incomefamilies.Severalmunicipalitieshaddevisedtheirownincentiveschemestoboostlocalpropertymarkets:inShanghaithelendingquotafromtheHousingProvidentFundwasraised,andHangzhouofferedmuchprizedurbanhouseholdregistrationsasabenefitofhomepurchase.

Otherincentiveschemeswerepublicised,intandemwith,butnotformallypartof,theRmb4trnstimuluspackage.Forexample,GuangdongprovinceannouncedthatitwouldinvestRmb50bntoretainindustrywithinprovincialborders,throughschemestoassistcompaniestorelocatetolower-costregionswithintheprovince,andtoupgradetheirmanufacturingprocesses.



4. How will it be funded?

The original plan

China’sannualCentralEconomicWorkConferencewasheldinBeijingonDecember8th,afterwhichseveralallocationsfromthestimuluspackagebecamemoredetailed.Specificfundingchannelswere

stillrathervague,butitwasannouncedattheconferencethatcentralfundswouldmakeup30%ofthetotalRmb4trnamount(Rmb1.18trn),withlocalgovernmentsandenterprisesexpectedtocontributethebalance1.ThesharefromlocalgovernmentswasprojectedtobeRmb1.23trn,withthebalance(Rmb1.59trn)tocomefrombanklending.Additionalliquiditywouldbegainedbyexpandingtheissueoftreasurybonds.Fundingdiversificationwouldbefacilitatedbypermittinginsurancecompaniestoinvestininfrastructureprojects,andfurtherbusiness-friendlymeasurestosimplifyadministrativeandlendingproceduresandcuttaxeswereannounced.

The banksInitsdrivetoboostcreditflows,theStateCouncilincreasedthecreditquotasforthestatebanksthroughanextralendingtrancheofRmb100bnthatitauthorisedtothethreepolicybanks:theChinaDevelopmentBank,ChinaExportandImportBank,andChinaAgriculturalDevelopmentBank.Policylendingquicklyalreadybenefitedfromthis,withtheBankofChinaandtheAgriculturalBankofChinabothsigningco-operationagreementswiththeMinistryofRailwaystosupportrailwayinfrastructureinvestment.TheyjoinedtheChinaConstructionBank,theIndustrialandCommercialBankofChinaandtheChinaDevelopmentBank,allofwhichalsopledgedloansupporttotherailwayinfrastructurebuild-out.InthecaseoftheChinaDevelopmentBank,22specificrailprojectswereidentifiedforthefundingagreement,mostofwhichareintheinteriorprovincesandarepresumablyriskierinvestmentsforcommerciallending.Inotherinstances,itwaslessclearwhichbankwasfundingwhichproject:otherloanagreementsannouncedcoincidentallywiththestimuluspackage(notablythemorecredit-worthyBeijing-Shanghaihigh-speedlink,whichisalreadyunderconstruction)appeartohavebeenwellover-subscribed,evenbeforetheNovemberstimuluspackagewasreleased.

1InitialreportsindicatedthatthecontributionofthecentralgovernmentwouldbeRmb2.5bn,butthisshranktoRmb1.18trn.



5. A budgetary challenge

Problems with the budget

Inthenewcalendaryear,China’sseniorpolicymakerswarnedofsevereeconomicchallengestocome,evenasthecountry’sstimuluspackagewasbeingexpandedtoincludetaxcutsandothersectoral

incentivesforgrowth.Thefinanceminister,XieXuren,warnedoffurtherrevenueshortfalls.Whereasfiscalrevenuehadincreasedin2008toRmb6.13trn,expenditurehadbeenRmb6.24trn,resultinginabudgetdeficitofRmb111bn.Andthiswasrelativelymodest,giventhevolumeofunanticipatedexpenditurein2008,suchasfuelsubsidiestooffsetspirallingoilpricesandreconstructioncostsfollowingtheSichuanearthquakeinMaythatyear.

NationallyThebudgetestimatefor2009,whichwasputforwardattheNationalPeople’sCongresssessioninMarch2009,balloonedasaresultoftheeconomicslowdownandthegovernment’sameliorativemeasures.Apartfromthecentralgovernment’scontributionofRmb1.18trntotheRmb4trnstimuluspackage,morespendingwasneededtofundtheseriesofsubsidiesandincentiveprogrammestargetedatspecificsectoralsupport.MostofthebudgetdiscussionsinthecourseoftheMarch2009sessionoftheNationalPeople’sCongresstookplacebehindcloseddoors,butthebroadoutlineofthebudgetestimateswasreleasedtothepublic,andwasamixofannualexpenditurewithadditionalstimulusmeasures.Accordingtothebudgetproposalfor2009/10fiscalyear,redistributivepublicspendingwastorisebyRmb487bntoRmb908bn.Agriculturalsubsidiesweretoincreaseby19.4%toRmb123bn,whichwouldcoverassistancetograinproducersandsupportforagriculturalmachinerysales.FurthersubsidiesforthefarmsectorbroughtthetotaltoRmb716bn(ariseof20.2%yearonyear)toaidtheruraleconomy,includingRmb103bntosubsidisepurchasesofdomesticappliancesandvehiclesbyruralhouseholds,aswellasincreasestograinreserves.Othersocialspendingwastoincreaseby17.6%(forsocialsecurityexpenses,suchaslow-incomesupportpayments)whilehealthcareexpendituresweretobeboostedbyRmb118bn.Spendingonlow-costpublichousingwassetatRmb43bn,withRmb130bnforearthquakereconstructionwork.Rmb42bnwasearmarkedforjobcreationprogrammes.Thelargessewasnotconfinedtosocialspending.Thedefencebudgetincreasedby14.9%toRmb480bn,andprogrammesofsupportfortenmajorindustries(automotives;steel;textiles;shipbuilding;petrochemicals;non-ferrousmetals;equipmentmanufacturing;informationtechnology;lightindustryandlogistics),wereproclaimedeventhoughinsomecasesthesupportwasstillnotional,awaitingprecisedirectivesforindustrialrestructuring.Industrialinnovationwasalsotobeboostedbyanexpandedbudgetforscienceandtechnology,whichwasincreasedby25.6%toRmb146bn.

Overallcentralgovernmentexpenditurewasforecasttoincreaseby24%in2009/10,toreachRmb4.38trn,whilerevenuewasonlyestimatedtoreachRmb3.58trn,leavingadeficitofRmb750bn.Revenuegrowthin2009wasforecasttoslowto8%,intandemwithweakereconomicresultsandlessbuoyantsales.Fiscalrevenuehadgrownby19.5%in2008,buttheloomingshortfallbecameevidentin



fiscalflowsinthesecondhalfof2008,whenrevenueslumpedfromthe33.5%growthrecordedinthefirsthalfof2008toapaltry3.2%.SlowergrowthwasattributedtoanincreasedrateofVATexportrebatesaswellasdecreasingcarsalesandbusinessvolumes.Combinedcentralandprovincialbudgetrevenuein2009/10wasforecastatRmb6.62trn(anincreaseof8%yearonyear),foranaggregateddeficitofRmb950bn.ThisisanenormousincreasecomparedwiththeRmb180bnfiscaldeficitin2008,andrepresents3%ofGDP.

Workonthebudgettookonabroader(andmoreperturbing)policycontextasthecentralgovernment’sfiscalrevenuecontinuedtodeclinein2009:January-April2009taxrevenuefellby9.9%fromtheyear-earlierperiod.Expenditure,however,climbedby31.7%inthesameperiod.Withsuchlosses,additionalfundraisingwasnecessary,althoughcentralrevenuedidreceiveaRmb50bngrantfromthepremier’semergencyaccount(thecentralbudgetstabilisationfund),aswellasincreasedtaxesfromfuelsales.Payingforallthefiscalstimulusmunificenceclearlycalledformoreinnovationinpublicfinancing.

ProvinciallyWhilethecentralgovernmentcanarguablyaffordsuchdeficitspending,mostlocaladministrationsarelesswellpositionedtoincreasetheirfiscalcontributionsforstimulusmeasures,especiallyastheyarereliantonincomefromlandsalesformuchoftheirrevenue,andwerethusdisadvantagedbythedepressedhousingmarket.TheirpredicamentobligedtheMinistryofFinancetogetintothebondmarketontheirbehalf.Thisfundraisingmeasurehaspoliticalimplications.Fortheprovinces,raisingmoneythroughbondissuanceiscomplicatedbya1995budgetlawthatbanslocalgovernmentsfromissuingbondsintheirownname,orfromrunningbudgetdeficits.Inordertocircumventtheseconstraints,the“provincial”bondsbindsub-nationalgovernmentsincomplextransferpaymentarrangementswiththecentralgovernment.Thebondswillhaveamaturityofthreeyears,andinterestincomeonthebondswillbeexemptfromtaxes.Purchasesoftheseprovincialandmunicipalbondswereliberalisedearlierintheyeartopermitinsurancefirmstoplaceupto15%oftheirtotalassetsinsuchinvestments.Inmid-May2009,ChinaissuedRmb13.1bninthree-yearlocalgovernmentbonds,aspartofitsprojectofissuingRmb200bninlocalgovernmentbonds(forthefiscalstimuluspackage)throughtheMinistryofFinance.InMarch,XinjiangproceededwithaRmb3bnissuanceandtheearlyMayallotmentwassharedamongHubeiandSichuanprovinces,aswellaswithDalian,inLiaoningprovince.ThiswasfollowedinlateMaywhentheministryissuedRmb16.9bninthree-yearlocalbondsonbehalfofGuangxi(Rmb3.5bn),Beijing(Rmb5.6bn),Shanghai(Rmb4bn)andHenan(Rmb3.8bn).



6. More forms of relief

Rural finances

Ruralfinancesweretoreceiveanumberofincentivestopromoteruraleconomicdevelopment.Pricehikesforagriculturalproduceandsubsidiesforfarmmachineryandplantingcostsweredesignedto

boostruralincomes.However,specificearmarkingofgrantstoimproveruralinfrastructureonlygainedRmb5bnoftheinitialRmb100bnthatwastobespentbytheendofthefirstquarterof2009.Cross-fundingofprojectswastohaveboostedthatamount(theMinistryofWaterResourceshadallocated25%ofitsRmb20bngrantonsafedrinkingwaterprojects,andRmb2bnonexpeditedworkontheSouth-Northwaterdiversionproject).Othercross-fundingwasallocatedtotheMinistryofHealthforexpandingtheruralclinicsystem.

Tax reliefSimplifiedadministrativeprocedurestoboostbusinessconfidenceconstituteanelementoftheRmb120bnworthoftaxincentivesinthestimuluspackage,buttheywerealsopartofapre-existingsequenceofmeasures.InlateNovember,Rmb19bninfeecutswereannouncedfor100differenttransactions,tobecomeeffectiveonJanuary1st.ThisfollowedanearlierannouncementtocutRmb17bninfeespayablebymarketsandhouseholdenterprises,effectiveSeptember1st.Sector-specificindustrialassistancehasalsofeaturedtaxreductions,notablyforthetextileindustry,whilereductionsinexporttaxeson102items(includingcontentiousagriculturalandindustrialtradegoodssuchasgraincrops,fertilisersandsteel)cameintoeffectonDecember1st.Exporttaxrebatesonover3,000items,includinglabour-intensivemanufacturedgoods,wereraised,effectiveDecember1st.

SubsidiesAtrialprogrammeofsubsidiesforpurchasesofelectronichomeappliancesbyruralconsumershadinitiallybeenintroducedinfourprovincesinlate2007,andasaresultsalesreportedlyincreasedby30%.Followingthisencouragement,theprogrammewasextendedto22provincesinFebruary2009,andbyAprilhadbeenexpandedtocovertheentirecountry.Ruralpurchasersofselectedtelevisions,refrigerators,washingmachinesandmobilephones(pluscomputers,whichwereaddedtotheeligibilitylistlater)receiveasubsidyof13%offthelistedprice.AdditionalprogrammeswereannouncedinMay2009bytheStateCounciltoencouragehouseholdspending:consumersinfourprovincesandfivecitieswillreceive10%discountsfortradinginusedelectronicproductstopurchasenewitems.

Controls liftedInflation,whichhadbeenconsideredamajoreconomicchallengeinearly2008,hadsubsidedto2.4%inNovemberofthatyear,andinearlyDecemberthecentralgovernmentliftedthepricecontrolsthathadbeenimposedonfoodstaplesinmid-January2008.Furtherassistancetotheagriculturalsectorwas



grantedlateintheyearthroughincreasedgovernmentpurchasesofstaplessuchascottonandsoybeans,bothofwhichsufferedpricedeclinesowingtolowereddemand.Dramaticallylowerglobalfuelpricesallowedforsuccessivecutsinretailfuelprices(byupto17%inmid-December,andbyafurther2-3%inmid-January2009),andfacilitatedtheintroductionofafueltaxeffectiveJanuary1st2009.ThegasolinetaxincreasedfromRmb0.2toRmb1perlitre,andfromRmb0.1toRmb0.8perlitrefordiesel—thesetaxincreasesweretocompensateforrevenuelostbytheconcurrentabolitionofvariousroadtolls.

Reversal of monetary and fiscal measures InlateDecember2008,thePeople’sBankofChina(PBC)cutinterestratesforthefifthtimesinceSeptember2008,andreducedbanks’reserveratiorequirement.Currentone-yearpolicylendingratesare5.31%.Chinaalsoannouncedthatitsmoneysupply(M2)growthtargetin2009wouldbe17%(ithadbeen16%in2008).Commerciallendingwastobemoreflexible,withalendingquotaofRmb4.6trnallocatedfor2009,anincreaseof15%overthe2008quota.AccordingtoMinistryofFinancecalculations,the2009fiscaldeficitwasexpectedtoincreaseby56%yearonyearin2009toRmb280bn,owingtofallingrevenueandincreasedexpenditure.Althoughfiscalrevenueincreasedby19%yearonyearin2008tooverRmb6trn,thiswasamuchslowerrateofgrowththanthe32.4%revenueincreaserecordedin2007.

Tax rebatesChina’sexportsalesfellby2.2%inNovemberandby2.8%inDecember.Importsalsodropped,byastartling21.3%inDecember(toUS$72.2bn),asdomesticmanufacturersrequiredfewerimportedcomponentsfortheirindustrialprocesses.Tellingly,theMinistryofCommercebegantowarnChineseexportersofcreditrisks,encouragingthemtopurchaseexportinsurancetoguardagainstpaymentdefaultsbyimportersandshippers.IndemnitiespaidbytheChinaExportandCreditInsuranceCorporationroseby174.5%inJanuary–November2008fromtheyear-earlierperiod.China’soverseasinvestmentsalsocameunderstricterscrutiny,andtheMinistryofCommerceannouncednewguidelinesrequiringitsapprovalforoverseasinvestmentsofUS$100mormore.Gloomytradefigurespromptedmoreimporttaxcuts,andChinaannouncedinlateDecemberthatitwouldraise(orreinstate)exporttaxrebatesonavarietyofitems,notablymachineryandelectronicproducts,toboostexportsales.China’sexportscontinuedtheirslumpinthenewyear,asitsmajortradingpartners(theEU,USandJapan)allsufferedfromweakeconomicconditions,andChina’sbilateraltradeshrunkaccordingly.China’sexportsdeclinedby25.7%inFebruary2009,limpedtoa17.1%declineinMarch,andsunkagainby22.6%inApril.Inalignmentwiththesedecreases,thegovernmenthasincreaseditsexporttaxrebatesandexpandedtheeligibilitylist.

Housing assistanceInmid-2008China’spropertysectorbegantofalter,andtheweakerhousingmarketdraggeddownsalesofconstructionmaterials.PartoftheRmb4trnstimuluspackageannouncedonNovember9thincludedprovisionofhousingforlow-incomehouseholds,andanadditionalRmb10bninsubsidieswasannounced



inDecemberforaffordable-housingprojects,withatargetof1.3mlow-costhousesayeartobeconstructedfrom2009to2011.Furtherassistancetolow-incomehouseholdswasannouncedinJanuary2009,intheformofaone-offpayment,timedtocoincidewiththeLunarNewYear,ofRmb100forruraldwellers,andRmb150forurbandwellers(foratotalexpenditureofRmb9bn).Thisreflectsanupwardrevisionintheeligibilitycriteriafor“poverty-strickenhouseholds”(fromRmb785toRmb1,100annualincome),resultinginariseinthatcategoryfrom14.8mto43.2mpeople.

And so onAdditionalsector-specificmeasurescontinuedtoappearinApril2009,asdidtaxincentivestoboostexports.AseriesofexportrebaterisestookeffectonApril1stfortextileandapparelmakers,steelandnon-ferrousproducers,petrochemicalandlightindustrialgoods.InearlyApril,theStateCouncilannouncedathree-yearRmb850bnfundingprogrammeofinvestmentinhealthcare,asafirststepinprovidingbasicmedicalcoverageto90%ofthecountry’spopulationby2011.Itwillalsoincludetheestablishmentof7,000hospitalsandclinicstoprovideprimarycareatthevillageandtownshiplevel.Thismeasureisintendedtoincreasedomesticconsumptionbyprovidingamoreeffectivesocialsafetynet.OtherstimulusmeasurestoboostlocalconsumptionhavebeenencouragedbytheMinistryofCommerce,andsomeratherquirkymeasureswereadoptedbyprovincesandmunicipalitiesthathadbeenparticularlyhardhitbythedropinexportmanufacturing.China’spremierexportingprovince,Guangdong,inauguratedanRmb20mprojecttoencourageseniorstojointourgroups,andZhenjiangandNanjinginJiangsuprovince,aswellasNingboinZhejiangprovince,issuedtourismvouchersforlocalscenicspots.



7. Where will it go?

Industrial restructuring

Investmentinsocialservices,eitherdirectlythroughthestimuluspackageorthroughparallelprogrammes,continuedtobeovershadowedbydirectsubsidiesbythecentralgovernmenttoindustry,

notablytolabour-intensivesectors.Theailingtextileindustrybenefitedinthenewyearfromafurtherincreaseinthetaxrebateforexporters,from14%to15%.(Therebatehadbeenraisedfrom13%inNovember2008.)Otherindustrialsupportinitiallymayhavebeenpromptedbyspecialpleadingbyindustry,butquicklybecomealliedwithspecificgovernmenttargets.Thepetrochemicalsector,whichwasengagedinacrimoniousnegotiationswiththegovernmentformostof2008overarbitragesubsidiestobridgethegapbetweenhighglobalpricesforcrudeoilimportsandcontrolledpricesfordomesticsalesofrefinedoilproducts,receivedRmb100bnforinvestmentinupgradesofrefineriesforcleanerfuels.ThiswastobedividedbetweenRmb60bnin2008toupgradegasolinerefining,andanotherRmb40bnby2010forsulphuremissionreductionindieselproduction.China’spowersectorwasalsotoreceivesupport,intheformofRmb10bnworthofsubsidiestopowercompaniesandgridoperators,tooffsetlossesresultingfromthedifferencebetweenhighcoalcostsin2008andpricecapsonpowerprices.

Chinaalsounveiledproposalstoexpandandconsolidateitsoilsectorthroughaseriesoffiscalsupportandmergers.Themostsignificantresource-relatedinfrastructurecomponentofthestimuluspackageistheplannedconstructionofninerefiningbases,whichwouldincreaserefiningcapacityinChinato440mmetrictonnes.Someenergyinvestmentsarealreadyyieldingbenefitsforselectedequipmentsuppliers,andareprovidinghopeforfurtherworkorders:InvensysProcessSystems,aUSmachinerysupplier,signedanequipmentcontractfortwonuclearpowerplantsinearlyMarch.Thestimuluspackageincludestennuclearfacilities,comprisingexpansionofexistingplantsaswellasgreenfieldprojects.TheStateGridCorpofChinaannouncedinmid-FebruarythatitwouldinvestRmb31bntoupgradeitsoperations,mostnotablyinthenorth-westernprovinces,whereitwilllinklocalgridsandbuildsub-stationsinXinjiangandTibet.AdditionalsubsidieswereannouncedbytheMinistryofFinancetoencouragethepurchaseofenergy-efficientlightbulbs.Thetargetin2009wasincreasedto100mbulbs,doublethevolumeofthe2008campaign.

Theautomotivesectoralsobecamethefocusofspecificpolicyattention.Althoughvehiclesalesdidgrowby6.7%in2008,25%ofChina’smajormanufacturers(45enterprises)inthesectorfailedtoreachhalftheirannualsalestargetsthatyear,accordingtotheChinaAssociationofAutomobileManufacturers.Thesalestaxforsmallcars(engineslessthan1.6litres)wascutfrom10%to5%asatemporarymeasure(until2010),andathree-yearprogrammeofincentivestotallingRmb10bnwasannouncedtoassistautomakerstoupgradeenergyefficiencyinautoproduction.AfurtherRmb5bnwasallocatedtosubsidisefarmerstopurchaseminivansandsub-1.3litreminibuses.Suchmeasuresappeartohavebeeneffectiveinboostingdemand:vehiclesaleshitarecord1.15munitsinApril2009,upby25%yearonyear.

Acentralelementofthestimuluspackagefortheautomotivesectorinvolvestheconsolidationofoperationsandthepromotionofasmallernumberoflargercarmakers(from14majormanufacturers



to10,by2011)toleadtheindustry,eachwithannualproductioncapacityofover1munits,witha10%annualincrease.Theproductiontargetfor2009is10munits(upfrom9.34munitsin2008),andfourautoconglomerateshavebeenidentifiedasmajorplayersintheconsolidationtemplate:FirstAutomotiveWorks(Changchun),Dongfeng(Wuhan),ShanghaiAutomotiveIndustryCorp,andChang’anAuto(Chongqing).

Shipbuildingwasanothersectorthataskedforhelp.Shipbuildingordersslumpedby44%in2008andshipbuildingcompaniessuccessfullyarguedthatgovernmentsubsidieswererequiredtoeaserestructuring.InearlyFebruarytheStateCouncilannouncedthatithadplacedathree-yearmoratoriumontheestablishmentofanynewshipyardsinChina,inordertocopewithaglutofshipyardcapacityamidslowingfreightorders.Typically,thepoliticalcostofsuchanindustrialrevitalisationplanhasmeanttheacceptanceofagovernment-mandatedconsolidation.Inthecaseofshipbuilding,only20mainlandshipyardswillreceivestimulusfunds,accordingtoRenYuanlin,chairmanofYangzijiangShipbuilding,therebygivingbigfirmsmoreleveragetoacquiresmallerplayersandhenceadvanceconsolidation.

Anothersectorthatsufferedsubstantiallossesisaviation,andalthoughitisnotasectorthathasbeenidentifiedintheindustrialrestructuringprogrammeunderthestimuluspackage,thecentralgovernmenthasinjectedlargeamountsofcapitalinbothairlineoperationsandaviationmanufacturing.InearlyJanuary,theChinaAviationIndustryCorpreceivedRmb176bninpledgedfinancingforitsaircraftandhelicoptermanufacturingprojects.TheMinistryofFinanceexemptedairlinesfrompayingfuelsurcharges(retroactivelyfromJanuary2008),andgovernmentassistancetospecificairlineoperationshastakentheformofloans(suchasRmb7bninnewfundingforChinaEasternAirlines,whichsufferedaRmb6.2bnlossonfuel-hedgingcontracts)aswellascapitalinjections.

Innovative technologyInmid-May,theStateCouncilannouncedRmb63bnworthoffundingtosupport11nationalresearchprogrammes.Thesecoverarangeofbiomedicalprojects(newdrugdevelopment,aswellasresearchonmajorinfectiousdiseasessuchasHIV/AIDSandhepatitis),inadditiontoIT,energyandenvironmentaltechnologies.Althoughspecificinvestmentscheduleshavenotyetbeenreleased,itappearsthatfundingtopre-establishedresearchprogrammeswillbeincreased,aswillspecialso-calledincubatorfundstohelpstart-upcompaniesinbiomedicine.



8. How has it actually been funded?

To date

ByApril2009,thecentralgovernmenthaddisbursedRmb304bn(inthreetranchesofspendingwiththefirstinNovember2008,followedbyFebruaryandApril2009respectively)—or25.8%ofitsshare

inthetwo-yearinvestmentcycle.Thefirsttranche(inNovember)amountedtoRmb104bn,and,accordingtoNDRCsources,wenttosupportinvestmentinpre-existingprojects.BythetimethesecondtranchewasreleasedinFebruary,asufficientnumberofnewprojectshadbeenidentifiedsothatthesecondbatchoffunding(Rmb130bn)wasdirectedtothem.ThethirdtranchewasreleasedinApril(Rmb70bn).

Case study: Specific allocations for 2nd tranche of central government funding (Rmb130bn,February2009)

Specifictargetedareas:1) Low-costhousing:Rmb28bn2) Ruralinfrastructure(drinkingwatersafety,electricitygridimprovement,roadrepair,methanegassupply,unsafehousingrepairandsettlementhomesforethnicminorities):Rmb31.5bn3) Majorinfrastructureprojects:Rmb27.5bn4) Majorhealthandeducationprojects:Rmb17bn5) Environmentalprojects:Rmb11bn6) IndustrialRestructuring:majorindustrydevelopmentandtechnologyupgrades:Rmb15bn

Thegovernmentappearstohavefine-tunedareasofspendinginthesecondtrancheoffunds.Forexample,ruralinfrastructureprojectswerenarroweddownfrom15categoriestosix,togenerateamore

significantimpact.Inthefirsttranche,Rmb6bnhadbeenallocatedtosixareasunderthe“industrialrestructuring”heading:indigenousinnovation;industrialisationofhigh-tech;developmentoftheservicessector;nuclear-andwind-powerequipmentlocalisationandindustrytechnologyupgrades.Bythesecondtranche,thebudgetforindustrialrestructuringhadbeenincreasedtoacommitmentofRmb15bn,andthefocushadbecomemorespecificallydirectedtowardsindustrialdevelopmentandtechnologicalupgrades.

Interestingly,thethirdtrancheofRmb70bniswellbelowtheexpectationsofprovincesandobservers.Itisaclearindicationthatcentralauthoritieshavebecomeconcernedaboutpotentialwhiteelephantprojectsadvocatedbyprovinces.OnegovernmentofficialfromtheNDRCsaidthatthereasonthecentralgovernmenthasslowedthepaceofinvestmentisbecausemanyoftheprojectssubmittedbytheprovincesareunsuitable,andrequirefurthercarefulfeasibilitystudies.“Thekey”,hesaid,“istomakesureoftheimplementationoftheprojectsinvestedbythefirsttwobatchesoffunding.”

Focus box

Sofarthreebatchesofcentralgovernmentfundinghavebeenunveiled,foratotalofRmb304bn,disbursedinNovember2008(Rmb104bn),February2009(Rmb130bn)andApril2009(Rmb70bn)respectively.

Thefocusofprojectsannouncedinthecourseofthethreeallocations

isinlinewiththesixtargetedareasthegovernmenthassetforth(seecasestudybelow,Specific allocations for 2nd tranche of central government funding).Intheprocess,therehasbeensomefine-tuningofspecificareasofgovernmentattention,particularlyfollowingthefirstroundofallocations,whenRmb104bnwasdisbursed.

Inthesecondroundofallocations,oftheRmb130bnthatwasdisbursed,Rmb35bnwastofundcentralgovernmentprojects,whilethebalance(Rmb95bn)wastoflowtolocalgovernmentprojects.



The banksByfarthegreateramountoffundingforthestimulushascomefrombanklending.NewloanissuancesoaredtoRmb4.58trninthefirstquarterof2009alone,someRmb3.3trnhigherthanintheyear-earlierperiod.Ofbanklending,40%(ofthetotalRmb4.58trnbanklendinginthefirstquarterof2009,thusequivalenttoRmb1.83trn)wasestimatedbyanNDRCofficialashavingbeenallocatedtomediumtolong-termstimulusfundprojects,mostofteninfrastructureprojectswithimplicitgovernmentbacking.ThismeansthatbankshavealreadycontributedRmb1.83trntothestimulusprogramme,oroversixtimestheamountthatthecentralgovernmenthasinvestedsofar,andwellexceedingtheRmb1.59trninitiallyenvisagedastheircontribution.

Therearethreepossibleexplanationsforthebanks’oversubscription:1)banklendinghasbeendirectednotonlyattheRmb4trnstimulusplan,butalsoatothergovernmentprojects;2)banksarelendingmorequicklythanexpected,andhavetakenamuchbiggershareofprojectfinancethanthegovernmenthadenvisaged;and3)localgovernmentshavenotcomeupwithsufficientfundingfortheirshare,andinsteadusefundingfrombanksforproxy“shellinvestments”toserveascollateralforbankloans.Thelatterpracticewascommoninpre-IPO(initialpublicoffering)daysforlocalbanks,butitsreappearancenowisseenasaworryingsignthatpolicy-directedlendinghasreturnedtothebankingscene.

Theexplosionincreditisinpartexplainedbybanks’desiretolendtothefirstbatchofapprovedinvestmentplans,andmanybankshaveformedconsortiumstoprovidefinancingandsharerisks.Withthegovernment’simplicitguaranteeaswellasthelong-termprospectsoftheseprojects—thepaybackperiodoftenlastsmorethantenyears—apotentialincreaseinthenon-performingloanratioiscurrentlytheleastoftheirworries,althoughthespeedoftheramp-upinlendingsuggeststhatcreditrisksforindividualprojectshavenotbeenproperlyassessed.

Despitefiveinterest-ratecutsinthefourthquarterof2008,monetarypolicyhasremainedconstantsinceDecember2008,withtheone-yearlendingratecurrentlysetat5.31%.Theone-yeardepositrateis2.25%.ByMay2009,China’sastonishinggrowthofcredithadappearedtobestabilising,withbanklendinginAprilshrinkingtoastillrobustRmb591.8bn.ThisismodestsumcomparedwiththeRmb4.58trnextendedinloansforthefirstquarterof2009,butstillmuchhigherthantheusualaverageforApril.InlateApril,thePeople’sBankofChina(PBC),inameetingwithofficialsfromthefivemaincommercialbanks,calledforlendingtobesteadierandmorerational,andthechairmanofthePBC,LiuMingkang,warnedofgrowingworriesofcreditrisk.Nonetheless,thebankannouncedthatitwouldmaintaina“”moderatelyloose”monetarypolicy.CaiEsheng,thevice-chairmanofthePBC,estimatedthatin2009theoverallannualrateofbanklendingwouldbeRmb8trn,asignificantrisefromprojectionsinmid-December2008thatin2009M2wouldgrowby17%,whichwouldimplyasubstantialslowingfromtheend-April2009M2growthrateof25.95%.However,banklendingcontinuedinthefollowingmonths,reachingRmb664.5bninMay.LendingjumpedtoRmb1.23trninJune,bringingthesix-monthtotaltoRmb7.37trnand,accordingtothePeople’sBankofChina,M2hadrisenby28.46%bymid-year.



9. Our assessment

WhohasbenefitedsofarfromChina’sstimuluspolicy?Ingeneralterms,theinterventioniststateisonceagaintakingtheleadingroleindirectingtheChineseeconomy.Thisphenomenonhasbeen

popularlydescribedasareversalofthepoliticalslogan“thestateretreats,theprivatesectoradvances”(from国退民進 to 国進民退)tosignifythedominanceofthestatesectorintheeconomy.Anexplicitaimoftheindustrial-restructuringprogrammes(coveringtenindustrialsectors)istoconsolidatesmallerplayers,andfacilitatetheemergenceofasmallergroupofmajorenterprisesthatwillbegloballycompetitive.Theseemergingso-calledchampionsinthetenidentifiedsectorsalmostalwayshaveastate-ownedpedigree.

AnotherareawhereChina’sprivately-heldcompaniesareatadisadvantageisaccesstocapital.Oneoftheironiesofthestimulusplanisthatprivately-heldcompaniesarecomplainingofhighcreditcosts,evenasliquidityhasgushedthroughthebankingsystem.40%ofbanklendinginthefirstquarter(Rmb1.83bn)hasbeentomediumtolong-termprojects,mostofthemrelatingtoinfrastructureandfavouringstatefirmsasthemaincontractors.

Bail-outshavealsofavouredthestatesector.Chineseaviationhasseenthedemiseofprivately-heldairlines,whereasChinaEasternAirlinesandChinaSouthernAirlineshavebenefitedfromstatesupport.ChinaEasternsecuredbankfacilitiestotallingRmb46bninthelast12monthsfromfourmajorbanks,amongthemaloanfacilityofRmb11bnfromtheBankofCommunications,coveringareassuchasprojectfinance,securitisationofassets,internationalsettlementandinternetbanking.

Statesupporthasnotbeenwithoutmanystringsattached.Inreturnforgovernmentfunding,enterprisesarebeingpressuredintocomplyingwithconsolidationplans,despitetheless-than-bucolicrecordofarrangedcorporatemarriages,andthefailureofpasteffortstopushconsolidation.InearlyJuly,ChinaEasternandShanghaiAirlinesannouncedtheirmerger.Inthecaseofthelogisticssector,Rmb100bningovernmentfundingwillsupporttheconstructionofmodernmultimodaltransportandtransshipmentfacilities,buttheconsolidationthatisplannedtoaccompanythiswill,ifimplemented,streamlinethenumberofplayersinthesectorfrom2.7mtruckingfirmstoahandfuloflargetruckingfleets.

Intermsofbureaucraticturfwars,theNDRCistheclearwinner.Ithasre-establisheditsprimacyinsettingthemacroeconomicpolicyagendathroughitsroleasreviewer,co-ordinatorandapproveroffundingsubmissions.AnotherbigwinneristheMinistryofRailways.Asrecentlyaslastyear,theMinistryfacedtheriskofbeingabsorbedbyanexpansionistMinistryofTransport.However,LiuZhijun,therailwaysminister(dubbed“crazyLiu”bylocalrailwaybureausbecauseofhisfreneticworkstyle)hadsuccessfullyfoughtoffthemergerthroughaseriesofhigh-profileprojects:hedoubledthespeedofpassengertrainsinthepastthreeyears,andintroducedthe“Harmony”seriesoffastinter-citytrains.Thestimuluspackagehassincegivenhimandhiscolleaguesmanymoreopportunitiesforenhancingtheiralreadyambitiousplans:in2007,LiuintroducedaRmb1trnprogrammetoconstructmorethan5,000kmofhigh-speedelevatedrailways.Owingtothestimuluspackage,thishasnowgrowntoaplannednetworkof8,900kmoftrack,atacostofRmb2trn.



Beijing vs. the provincesThefundingbonanzahasalsointensifiedtheinherentlycomplicateddynamicsofcentripetalvs.centrifugalforcesinChinesepolitics.Thecentralgovernmentisrelyingonlocalgovernmentforco-fundingthefiscalstimulus,andinApril2009,thecentralgovernmentinBeijingannounceditsintentiontolowertheself-fundingratioforprojectfinancing.Inotherwords,bankshavebeenaskedtoprovidealargerpercentageoffinancingforgovernment-sponsoredprojects.Thepreviousfundingformulacalledforthelocalgovernmenttosupply35%ofprojectfinancingas“seedfunding”beforebeingabletoseekcentralgovernmentfunding,andhavingbankloanstocoverthebalance.Thiswasageneralisedratio;forsomespecificcategoriesofprojects,thebalanceoffundingwasdifferent(forexample,inMaythegovernmentloweredtheself-fundingratioforbudgetandgeneralhousingprojectsto20%from35%).Nowlocalgovernments’portionshavebeenlowered,andastheyarenolongerrequiredtocontributesuchheftydeposits,theycanspreadtheirresourcesamongmoreprojects.Oneestimateisthateveniftheprovincialshareoffixedassetinvestmentremainsatits2008level(anaggregateofRmb13.3trn)—whichishighlyunlikely,giventhemega-projectsandgrandinvestmentschemesproposedbymanyprovinces—provincialfundingin2009willbespreadmorebroadlyamongmoreprojects,becauseofloweredprovincialinvestmentthresholds

OfcoursetheprovincesaretakingcaretochooseprojectsthatostensiblysatisfyboththerequirementsoftheNDRCaswellastheirownpriorities,suchaspublictransportationsystems,airports,portsandtelecommunications.Nonetheless,somealarmbellshavebeguntoring,asevenwiththeloweredinvestmentrequirements,provincialresourcesarebeingstretched.Becauseofrestrictionsonprovincialdebtobligationsandbondissuance,localgovernmentsoftensetuppurpose-builtinvestmentagenciestoraisemoneyforprojectfinancingandmanagement.Theseso-calledundertakingunitsarecorporateentitiesthatcantakeondebt,andtheexpectationisthattheywillfloodthemarketthisyear.OnMay19th,theNationalAuditOfficerevealedthat“minorbutsignificant”irregularitieshadbeenuncoveredinstimulusspendinginthefirstquarterof2009,citingfraudinlocalfundingandfakecontracts.Italsonotedthatsomefundinghadgoneintobankdepositsratherthanintoprojects.Therehasalreadybeenonecaseoffakeddocumentationfromalocallyincorporatedmunicipaldevelopmentcorporation:YueyangcityinHunanprovincehashaditsdefactocorporatebondsde-listedfromtheinter-banktradingplatform,pendingfurtherinvestigation.Yueyang’scorporatebondswereinfactissuedbytheYueyangMunicipalConstructionInvestmentCo.,afundraisingagencywhichwasviewedbyinvestorsasbearingtheequivalentofasovereignguarantee.Moreseriousmalfeasancewouldinvolvefakingtheentireproject.TheNationalAuditOfficehasalreadywarnedaboutsuchdangersinitsselectedauditofthefirstroundsofcentralgovernmentinvestment.“Insomeless-developedregions,localgovernmentswillnotbeabletoprovideadequatefinancingforprojectsintimebecausetheydon’thaveenoughfiscalrevenuetofinancethem,”onereportreads.Otherpitfallsincludeduplicationofprojectsinruralareasbecauseoflackofco-ordinationandcarefulplanning.Anotherlongertermworryisthepush-pullinfluenceofthestimuluspackage:provincialprotectionism(andbudgets)forlocalindustrieswillbestrengthened,makingBeijing’sconsolidationstrategiesmoredifficulttoimplement.Protectionismonabroaderscaleisalsoaconcern.InlateJune,“buylocal”noticesbeganappearingonseveralgovernmentagencies’



websites,callingforChinesecompaniestobenefitfromstimulusspending.Thispromptedcriticismfromforeignchambersofcommerceandtraderepresentatives.ChinahasyettoratifyaWTOagreementongovernmentprocurement,whichwouldopensuchprojectstocompetitivebiddingfromforeignenterprises.

Allocations in batches and to localitiesWhileco-fundingarrangementsareacomplicationofthestimuluspackage,regionalpreferencescanalsohaveamajorbearingonpotentialbeneficiaries.Maincriteriaforcentralgovernmentallocationstoprovincesincludepopulationsizeandincomeperheadlevels,aswellasthedegreeofrelianceonthecentralgovernmentforfixedassetinvestments,withpreferencegiventopoorerprovinceswithlargerpopulations.Thenatureofprojectscanalsobesignificantinaffectingthesizeandnatureofthedisbursements,withprojectsspreadoverawidergeographicareatendingtohaveamoredecentralisedfundingandprojectmanagementbasis.Forexample,ofthesecondtrancheofRmb130bnannouncedinFebruary2009,Rmb28bnwasallocatedforlow-costhousing.OftheRmb28bn,Rmb3.05bnwastobe

Q1/09 Urban fixed asset investment, change %

HeilongjiangLiaoning

TibetNingxiaShaanxiQinghai

YunnanSichuanGuizhou

Inner MongoliaTianjinHainan

JiangxiGansu

GuangxiHebei

XinjiangHunan

AnhuiJilin

HubeiChongqing

HenanJiangsuShanxi

ShandongFujian

ZhejiangGuangdong

ShanghaiBeijing

-20 -10 0 10 20 30 40 50 60 70 80



allocatedtocentralgovernmentprojects,whileRmb24.95bnwastobedirectedtolocalprojects.Similarlyforruralinfrastructureorhealthandeducationprojects,localgovernmentstendtoreceivethemajorityoffunding.Bycontrast,fundingformajorinfrastructureprojectsisusuallykeptunderthepurviewofthecentralgovernment.Anobviousexampleofacentrally-managedprojectistherailwayexpansionproject,whichisentirelyunderthejurisdictionoftheMinistryofRailways.

Therearealsospecialgeographicfavouritesforappropriations.Thefourcentrally-administeredmunicipalities(Beijing,Shanghai,TianjinandChongqing),provinceswithlargeethnicminorities,andthenorthernprovincesallreceiveslightlylargerportionsofthestimuluspackage.Forexample,ofthefirsttwofundingtranches(totalRmb230bn)fromthecentralgovernment,ChongqingwasallocatedRmb7.6bn,or3.7%oftotalfunds,aboveitsproportionateshareof2.1%basedonpopulationsize.(Itspopulationis31m,or2.1%ofthenationalpopulation.)

Althoughitistooearlyfordefinitivecalculationsontheimpactofstimulusprojects,certainlythenorth-easternandwesternprovinceshadextraordinarygrowthinurbanfixedassetinvestmentinthefirstquarterof2009.GuangdongandShanghaihadthelowestgrowthrates,andBeijing(stillsatiatedfromitsinvestmentsmadeinpreparationforthe2008OlympicGames)shrankinyear-on-yearcomparison.

Local initiatives—another “Great Leap Forward”?Inconcertwiththecentralgovernment’sRmb4trnstimuluspackage,localprovinceshavebeenactivelyrollingouttheirowngrandinvestmentplans.Byonecalculationwidelyquotedinthelocalmedia,totalinvestment“wishlists”fromtheprovinceshavereachedanastronomicalRmb18trn.

Guangxi,thepoorsouth-westernprovinceborderingVietnam,providesagoodexampleofunrealisticexpectations.TheGuangxiprovincialgovernmenthasratheroptimisticallydesignated2009as“theyearofprojectmanagement”,settingoutplanstoincreasefixedassetinvestmentintheprovincetoRmb600bn.However,ofthefirsttwofundingtranchesfromthecentralgovernment(totallingRmb204bn),GuangxihasonlyreceivedRmb7.93bn(theprovincialpopulationis47.6m).

ThemanagingeditoroftheOrientalPost,aShanghaidailynewspaper,hascommentedthatChinesegovernmentofficialsare“economicanimals”.Officialsareusedtoself-promotioninattractingforeigndirectinvestment(FDI)aswellassupportfromcentralcoffers,andindeedthishasbecomeakeyperformanceindicatorinassessingthepromotionalprospectsforlocalofficials.Itcanalsoresultinrelentlesslyprotectionistambition,wherebythegoalistogetfundingfromthecentralgovernmentfirstandthendecidewhattodowiththefundinglater,whichusuallyleadstowastefulvanityprojects.

GDPforecastsattheprovinciallevelprovidesomeexampleofaggressivetargetingbylocalgovernments.Thecentralgovernmenthassetanationaltargetof8%GDPgrowthin2009,butmanyprovincialgovernmentshavesupersededthisbysettinghighergrowthobjectives.Chongqinghasseta12%GDPgrowthtargetfor2009,withtheaimtoachievefixedassetinvestmentofRmb500bn(ifrealised,thiswouldbeRmb100bnmorethanwhatwasachievedin2008).Chongqing’sChineseCommunistPartysecretary,BoXilai(theformerministerofcommerce),wasquotedassaying,“Whatevertasksthecentralgovernmentwantstodo,theywillbeachieved.”ThisisreminiscentofthefamoussayingduringthelunacyoftheGreatLeapForward:“Howmuchthelandwillproducewilldependonhowbraveyouare.”



Case study: Property—an exclusion zone

Todate,China’spropertyindustryhasplayedaminorroleintheshapingofthefiscalstimuluspackage.Beforetheindustrialrevitalisationplan(includingthetensectors)wasunveiledinMarch2009,theassumptionwasthatthepropertysectorwouldreceivesomeformofgovernmentassistance—afterall,constructionisaso-calledpillarindustryinmostlocalities,taxsupportmeasureshadbeenannouncedtoencouragehomeownership,andmanybuilding-

materialssupplychainshavebeenadverselyaffectedbytheslowingpropertymarket.Anotherargumentforgovernmentinterventionistherelianceonlandsalesasarevenuesourceforlocalgovernmentfiscalresources.However,publicperceptionsofpropertycompanies(andpropertymoguls)havebeenverynegative,withmanyblogsandop-edsaccusingpropertydevelopersofgeneratingexcessiveprofitsandcertainlyundeservingofanygovernmentbailout.Intheend,propertydevelopmentlostouttothelogisticsindustry,whichwillreceiveRmb100bnforinvestmentandrestructuring.



10. Our concerns

A herd of white elephants?

Sixmonthsafterthestimuluspackagewasunveiled,anumberofseriousconcernshaveemerged.TheissuesthattheyraisepointtosystemicweaknessesintheChineseeconomicandpoliticalsystems.Thespeedandfragmentednatureofprojectplanningarehazardsatthebestoftimes,butpose

particularriskswiththeacceleratedpaceofprojectwork.Somelocalities(andsectors)seemespeciallypronetoduplicativeinvestments.Forexample,priorto2000,therewasonlyonebridgecrossingtheYangtzeRiveratNanjing(theiconicdouble-deckerbridgethatwasbuiltintheMaoistera).By2005,twohighwaytollbridgeswerebuilt,neitherofwhichhasbeenfullyutilised.Now,withtheconstructionofahigh-speedexpressrailwaylinkbetweenShanghaiandBeijingshiftingintohighgear,theconstructionofyetanothertrans-Yangtzerailwaybridge(justonekilometreupstreamfromthethirdbridge)willsoonbecompleted.

Theobviousqueryastowhyamorecarefulfeasibilitystudywasnotdonesoastominimisethecostandeffortofbridgeconstructionunearthsanilluminatinganswer.Highway(road)bridgeconstructionfallswithintheportfoliooftheMinistryofTransport,whereasbuildingarailwaybridgeisthejoboftheMinistryofRailways.Overthepastfiveyears,theMinistryofRailwayshasfoughtabittercampaigntoavoidbeingabsorbedbytheMinistryofTransport.TheMinistryofRailwayshasnowseenitspowerincreasedasaresultofthestimulus’investmentintherailsector,soitwillproceedatfullspeedahead.Inonefellswoop,therailwaysministryhasenlargeditsplansforahigh-speedrailwaynetworkby50%,andtotalinvestmentforthenetworkisnowbudgetedatRmb2trn.

CriticshavepointedoutthataccelerationofrailwaybuildingwillbenefitmanufacturersinJapan,GermanyandFrancemorethanthoseinthelocaleconomy,asChinasourcesadvancedtechnologyfromtheworld’sleadinghigh-speedtrainmanufacturers.Theutilityofsuchavastnetworkofelevatedrailwaylinkshasalsobeenquestioned,asthecostsofordinaryraillinesareonly5%ofcostsofexpressrailways.However,theconstructionofelevatedraillinkswillprovideampleopportunitiesforconstructionfirmssuchastheChinaRailwayConstructionCorp.,aswellaslocalcontractsfordomesticcementandsteelmakers.

Otherpracticesarereminiscentofhistoricallegacy.Therailwayexpansionprojectfrequentlytoutsitselfasaleadingexampleof“no-obstacle”construction,usinglanguagefromMaoist-eracampaigns(workerscontinuedworkduringtheLunarNewYear,aswellastheMay1stholidays).Ratherimprobably,localmediareportedthatresidentsalongtherailroutevolunteeredtomoveawaytomakesurethatnodisputesaboutlandappropriationorcompensationimpededtheprogressofconstruction,owingtotheeffortsoflocalgovernment.Suchaltruisticpractices(eveniftrue),areactuallyincontrastwiththegovernment’spolicyshiftin2008toprovidemoresecurityforfarmers’landrights.Moresignificantly,theyalsosignaltheriskthatlandappropriationswillcontinueundertheguiseofacceleratingprojectsandeconomicrecovery.



Hasteoverspeedpresentsanotherhazard.BytheendofFebruary,Guangdonghadalreadycollectedallinvestmentproposalsfromthesub-provincialgovernmentlevelsandsubmittedthemtotheNDRCforapproval,apparentlyinanattempttogarnerasmuchgovernmentfundingaspossible.Thewidely-heldsuspicionisthatmanyofthesubmittedprojectshadinsufficientfeasibilitystudiesandricketyfundingarrangements(hallmarksof“tofu”,orshoddily-made,projects).Tellingly,GuangdongonlywonRmb2.1bn,or1.6%,outofthesecondtrancheofRmb130bninvestment.ThisisamuchsmallersharethanthatofChongqing,eventhoughGuangdonghasthreetimesasmanypeople.Moreover,thisisatatimewhenGuangdongissufferingparticularhardship.IndustrialoutputinGuangdongonlyroseby0.9%inthefirstquarterof2009,comparedwith13.6%growthinthefirstquarterof2008.

Environmentalfeasibilitystudiesarealsosuspectedtobeacasualtyoftherushforfunds,althoughtheMinistryofEnvironmentalProtectionisputtingabravefaceonitsclaimstomonitorprojects.Thevice-minister,ZhangLijun,toldanewsconferenceinearlyJunethathisministryhasrejectedorpostponed29projectproposalsandapproved365—althoughhedidacknowledgethatsomeregionsmayhavejumpedthegunandstartedconstructionbeforereceivingapproval.

Certainmega-projectshavebeenbroughtforwardforimplementation,regardlessofunresolvedcontroversyastotheirfeasibilityandbudget.Forexample,thelong-disputedHongKong-Macao-ZhuhaiBridge,whichhasbeenintheheadlinessincethe1990sforfundingissuesordisputesamongthethreepartiesoverthedetailsoftheroute,isnowsettoproceed,largelyowingtothestimuluspackage.The36-kmseaboardconstruction,consistingof26kmofbridgesand6.7kmoftunnels,willcostRmb72.6bn.

GigantismisanothercommonhazardinChineseprojectcycles,anditisoftendifficulttogaugeappropriatescalesforprojects,sothattheycanbeintegrated(orscaledupordown)asrequired.ThegovernmentplanstoinvestRmb90bnby2010forwastewatertreatment,includingplants,pipelinenetworks,pollutionpreventionandclean-uptreatmentformajorriversandlakes.Ofthis,Rmb12bnhasbeenearmarkedforenvironmentaltechnology,ofwhichRmb5bnwasallocatedforwastewatertreatmentplants.Inthefivedaysfollowingtheannouncementofthefunding,theMinistryofConstructionreceived

Focus boxDisclosure of government information

Theunprecedentedscaleofgovernmentspendinghaspromptedpressureformoregovernmentcandour.AShanghai-basedlawyer,YanYiming,hasfiledaseriesofrequeststotheMinistryofFinanceandtheNDRCseekingdisclosureofinformationaboutthefiscalstimuluspackage.HisapplicationstotheMinistryofFinancesoughtinformationonthegovernment’sbudgetingprocesses,andthesuitsagainsttheNDRCcalledformorespecificinformationonthestimuluspackage.MrYanhasbeenanactivistforshareholders’rightsandcorporatedisclosure,andhiscallsformoretransparency

ingovernmentspendinghavebeenechoedbymanysocialcommentators,withevendelegatestotheNationalPeople’sCongressurgingmorefulsomeprojectdescriptions.

Inresponse,inMarch2009theNDRCannouncedthatitwouldpublishprojectdetailsfromthestimuluspackageonitswebsite,althoughitstillrefrainsfromprovidinganyspecificsplansofinvestmentdetailsortargets.Itsaysthatitwillonlyunveilplansbatchbybatchoncetheapprovalprocesshasbeencompleted.OnereasonastowhytheNDRCmayprefertokeepdeliberationsonspendingdecisionsprivateisbecausepowerfulministriesandprovinceshavebeenlobbyingsoaggressivelyfortheirshareofthefunding.Anincreaseintransparencyrisksturningbehind-the-sceneslobbyingintoon-stagefighting—aspectaclethatthecentralgovernmentinBeijingwishestoavoid.



500applicationsnationwideforconstructionofwastewatertreatmentplants.Thisdelugeofproposalsrepresentedoverone-thirdofexistingplantcapacity,andmanyoftheproposalswereforlarge-scaleinstallations,eachrequiringfundingoverRmb100m.

Recipientsoffundingarealsocauseforconcern,asthebeneficiariesareoverwhelminglySOEsratherthanprivately-investedcompanies.GovernmentpurchaseordersalsofavourSOEs.AccordingtoaseniorexecutiveattheNewHopeGroup,analuminiumproducer(andoneofthelargestprivateenterprisesinChina),whenthegovernmentannouncedplanstobuylargequantitiesofaluminiumforthenationalreservetosupportcommodityprices,plantsofthestate-ownedChinalcowerefavouredoverthoseofNewHope,despitethefactthatNewHope’sproductiscostcompetitive.“Wedon’texpecttogainmuchfromthegovernmentstimulus,”heconcluded.

Whilsteveryefforthasbeentakentoverifytheaccuracyofthisinformation,neitherTheEconomistIntelligenceUnitLtd.northesponsorofthisreportcanacceptanyresponsibilityorliabilityforreliancebyanypersononthiswhitepaperoranyoftheinformation,opinionsorconclu-sionssetoutinthewhitepaper.

Coverimage:Corbis

A report from the Economist Intelligence Unit

Paper size: 210mm x 270mm

China’s Stimulus PackageA six month report card

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