NEWS BRIEF
Commentary: Will China's Stimulus Work?
November 14, 2008
Christopher Bjorke

Is four trillion yuan enough to save the world economy?

The Chinese government is betting that the amount will help bolster flagging growth rates and bail out ailing manufacturers, who are waiting to see how many of them will go bankrupt as a result of the drop in consumer spending in the United States and the global downturn.

Beijing on Monday announced the massive aid package worth $586 billion in government spending on infrastructure, rebuilding in earthquake zones, the environment, human services and other measures. Since then, analysts have been parsing the plan's details for signs of success or failure while markets have shown waning enthusiasm after an initial rally.

So far, expectations for the plan have been mixed.

Questions of effectiveness, size

The sheer size of the plan shows the government's aggressive stance toward the economic crisis. Bloomberg referred to it as Beijing's "bazooka," but at the same time questioned how the package would aid the country's exporters, which still account for a large portion of growth and are dependent on the economic health of foreign markets.

"The world is looking for more demand right now, not more supply," wrote Michael Pettis, a professor at Peking University's Guanghua School of Management, on his China financial blog. "The world will not simply absorb a lot more Chinese capacity. This package is useful to the extent that it boosts real demand, especially if it boosts household demand, but that doesn't seem to be in the cards."

Putting more spending power in the hands of Chinese consumers and giving them the confidence to spend rather than save has to be a big part of maintaining growth. While infrastructure spending will provide work for some the country's labor force, more spending on the social safety net would help unlock people's savings and shift it toward consumer spending.

There's also the question of the stimulus' true size. Researchers have pointed out that a portion of the announced spending includes previously allocated funds and existing projects, and the amount of new spending is unclear.

Markets have shown ambivalence toward the plan so far. While they rallied Monday after its announcement, they dropped off again by the middle of the week.

Ultimately, the effectiveness of the stimulus will be judged by its results. China's government has set a target of 7% annual growth as the minimum rate at which the country can continue its development and provide jobs and a way up for the still huge mass of workers trying to enter the middle class. Facing the prospect of social and economic fallout from the rest of the world's financial woes, the China's ambitious plan should be welcome during times that call for action.

Copyright © ChinaForum 2008