Review China's RMB 4 Trillion Stimulus Package

Recently, Chinese Premier Wen Jiabao defended China's RMB 4 Trillion (631 billion US dollars) Stimulus Package. Speaking at the opening ceremony of the Annual Meeting of the New Champions, also known as the 2012 Summer Davos, Wen said "I want to make it clear here that it was exactly due to our resolute decision and scientific response that China was able to avoid factory closures, job losses and the return of migrant workers to their home villages".

Since this year, continuous decline of Chinese economy becomes more and more obvious. The society has begun to expect a new round of economic stimulus plan, and some local governments even can’t wait, and have put forward their investment plans in advance, waiting for the arrival of the central money expansion policy. To the extent that the macroeconomy heads for uncertainty, it is urgent to review the 4-trillion-yuan stimulus package in 2008 and its effects.

In fact, such stimulus package mainly refers to the fiscal policies that covered the governmental investments in nine fields such as capital construction, agriculture, rural areas and farmers, indemnificatory apartments and taxation reforms etc. Besides, the package especially emphasized financial policy to support those fiscal stimulus. According to initial rough estimate, implementation of these projects totally needed about 4 trillion yuan till the end of 2010, and this is the origin of the 4-trillion-yuan stimulus package. Though the total investment is very high, it is not outrageous, only occupying 10% of the GDP in 2010. Viewing from financing sources, central government undertook 1.18 trillion, and provincial governments undertook 3 trillion. It is assorted by local governments, with the local debts issued by the central government, policy loans and local enterprise debts as the main parts. Money expansion is not extreme, and the side effects would be relevantly small.

But things change during the implementation. The supporting financial policy of the 4-trillion-yuan stimulus package—“Remove loan quotas on commercial lenders and reasonably expanding credit size”—was abused excessively. In 2009,  M2 growth rate was over 27%, the highest in recent more than ten years. The average annual new credit supply have soared from normal average annual amount of more than 3 trillion before 2007 to the current more than 7 trillion yuan above, and in 2009, nearly 10 trillion was newly supplied. At the end of 2011, M2 total amount increased over 100% compared to that of at the end of 2007.

Obviously, it is monetary expansion but not the government investments stimulated the economy. These policies eventually influenced the price. Remarkable money expansion led the higher rise of prices.

Releated costs go even further. Due to its economic policies mainly focused on pulling investments but not stimulating consumption, the prices of capital and productive factors rise. Also, production expanded especially in the industries of steel, cement and building materials etc. The problem is that Chinese market didn’t demand these corresponding products. In the past more than ten years, production expansion had been absorbed by huge exports, but after 2008, global economies were all in the depression, and the extra production of China that could be absorbed was limited. Therefore, we see that products that come from investments is unable to be demanded today, and excess production capacity appears in industries of steel and cement etc. in succession. If production is to be reduced, enterprises may face huge debts, and banking system will bear extremely large pressure.

But the biggest side-effect is losing the golden chance for further economic system reforms—such as imbalance of economic structure. As the stimulus package postponed needed reforms, China’s economy hasn’t found new growth engine by now.

When financial crisis in Europe and America endangered China’s export, the 4-trillion-yuan stimulus package indeed help stimulating the economy. But now we find that after enterprises have been forced to reduce capacities today, the crises of business failure and workers returning to hometowns still exist. Afterall, the 4-trillion-yuan stimulus package just postponed the crises, and we even need to bear the “high prices and high debt burdens” costs.

The stimulus package supposed to have a good ending. When announced in 2008 clearly, it required greater spending on education and health care, more environment protection such as preventing water pollution, extended tax reforms to cut corporates’ tax burden, etc. If these fiscal policies can be truly executed, though the recovery of the economy will not arrive as fast as the monetary expansion, the quality of economy will be improved, thereby the long-term total outputs will be expected. But these policies either have been forgotten or got out of form in the process of implementation, and at last we had to sigh with regrets. I hope that when coping with the economic recession right now, we will not stick to the old paths of monetary expansion, but truly invest the fiscal funds into the people's livelihoods and release a valuable 4-trillion-yuan stimulus package.

Originally published on No. 37 issue of Xinmin Weekly | 2012-9-19