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China’s Response to the Challenge of Global Economic Recession

Prof. Xingmin YinSchool of Economics, Fudan University

December 2009

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Topic

A. Challenges of global economic recessionB. Discussion on China’s major policiesC. How much will the government actually

spend?D. What is the GDP impact of this CNY four

trillion?E. 2009:Looking for the future?

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A. Challenges of Global Economic Recession

□ How bad will it be in 2009, and will there be a recovery in 2010?The boom of recent years seems like a distant memory, with the world economy slowing significantly through 2008 and appearing to fall off the edge of a cliff in the last few months.

□ The biggest recent problem is the slowdown in world trade. In the last couple of months, the expectation of a US recession and global downturn has been exacerbated by a significant contraction in credit and finance for trade, having a profound and immediate impact.

□ There are many structural problems in the US and Europe, such as the overhang of debt, that suggest the recession may not be followed by an early or strong rebound.

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Economic Crisis and Recession

□ A financial firestorm has been sweeping through the world, with its epicenter on Wall Street. Each day new markets seized up and new regions are infected.

□ A bearish view on the US economy.□ Can China escape the global firestorm?□ Consumption-led recession in the US and

Europe, and weakness in Japan exacerbated by housing bubble collapses in the US and the UK.

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□ Growth is negative one in European in both Q3 and Q4, and while the US had a dazzling Q2 in terms of GDP growth, unemployment is clearly on the rise and consumption has clearly fallen.

□ Business investment has held up in the US, but corporate confidence is weakening. It enters into a deep recession in both areas already.

□ It looks like the world is going to experience a longer, deeper slowdown than we feared.

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Economic Growth for Major Developed Economies

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

2000 2001 2002 2003 2004 2005 2006 2007 2008

%

United States Euro Area Japan

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Unemployment Rate for Major Developed Economies

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

2000 2001 2002 2003 2004 2005 2006 2007 2008

%

United States Euro Area Japan

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Zero Interest Rates?

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

2000

/2/2

2000

/8/2

2001

/2/2

2001

/8/2

2002

/2/2

2002

/8/2

2003

/2/2

2003

/8/2

2004

/2/2

2004

/8/2

2005

/2/2

2005

/8/2

2006

/2/2

2006

/8/2

2007

/2/2

2007

/8/2

2008

/2/2

2008

/8/2

%

Fed Rate

2.50

2.70

2.90

3.10

3.30

3.50

3.70

3.90

4.10

4.30

4.50

1999/1

/1

2000/1

/1

2001/1

/1

2002/1

/1

2003/1

/1

2004/1

/1

2005/1

/1

2006/1

/1

2007/1

/1

2008/1

/1

%

Main refinancing operations %

0.00

0.10

0.20

0.30

0.40

0.50

0.60

00/8

/11

01/2

/11

01/8

/11

02/2

/11

02/8

/11

03/2

/11

03/8

/11

04/2

/11

04/8

/11

05/2

/11

05/8

/11

06/2

/11

06/8

/11

07/2

/11

07/8

/11

08/2

/11

08/8

/11

%

Rate

US

Euro Area

Japan

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Discussion

□ We forecast that US unemployment will rise to 9.5% in 2009, but it could go significantly higher; European unemployment is already at these levels.

□ Japan and UK ……

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B. Discussion on China’s Major Policies

□ It was always the case that a US downturn would impact China, and this was both directly through slower exports and indirectly through equity markets and confidence.

□ China’s economy is slowing, growing 9% y/y in real terms in Q3. All three growth engines - exports, investment, and consumption – have spluttered.

□ Despite the slowdown, China will still be growing faster than many other economies in 2009.

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Major Policies for Stimulating China’s Economy

□ A package of fiscal policies……□ Major targets for the government policies: ☆ Economic growth ☆ Industrial restructuring supports ☆ The extension of welfare system to low-

income urban citizens and rural farmers

□ More ……

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A Package of Policies

□ The state council has announced a CNY four trillion (USD 590 billion) spending program covering the period Q4 2008 to year-end 2010.

□ The statement names a whole series of areas that would receive the money including roads, health, rural infrastructure, railways, low-cost housing, food subsides, Western development, and rural subsides, among others.

□ Certainly this kind of announcement is important to prevent sentiment from deteriorating further. The statement is clearly an attempt to change the tone of public debate and to raise confidence in the government’s willingness to support the economy through spending.

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Government Revenue and Expenditure

□ China fiscal system in general□ Higher growth rate for government revenue than ex

penditure……□ More taxes have been levied in the past four years.

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0

1000

2000

3000

4000

5000

6000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

billion yuan

0

5

10

15

20

25

30

35

%

Gov. revenue Gov. expenditure

Gov. revenue growth rate Gov. expenditure growth rate

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Tax Growth Rates

-10-505

10152025303540

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Growth rate (%

)

Total Value-added Business tax Co. income tax

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Key Infrastructure Investments

Investment programsAmount,

CNY billionNotes

Roads, airports, waterways etc.

(excluding railway)2,000 　

Railways800 -

2,000　

Building of low-cost houses 900 A new policy

Airports 550This money should be

spent over 2009 – 10.

Earthquake zone 1,000Total spending in

reconstruction

more 　 　

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C. How Much will the Government Actually Spend?

□ The central government is going to spend CNY 1.2 trillion (USD 180 billion) and is planning for local government and others provide the rest.

□ Do local governments have enough resources to take part?

□ Local government cannot issue bonds or borrow from other resources. Many will be feeling the fiscal strain in 2009 as their land sales, as well as enterprise tax and value-added tax revenue, fall.

□ The 0.3y/y decline in fiscal revenue in Oct. 2008 is likely to be causing more worry in the provinces than in Beijing.

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Fiscal Positions for the Central and locals

54.10%

45.90%

Central Local

Expenditure ratio of the central and local government

Revenue ratio of the central and local government

23%

77%

Central Local

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Comments on the Government Targets for Investments

□ Public housing□ Rural infrastructure investment□ Transport infrastructure□ Health and education□ Environment, including sewage, energy, etc.□ R&D□ Earthquake zone reconstruction□ Rural income supports

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Public Housing

□ The plan with large-scale construction low-cost rental housing, as well as, economic housing (which is usually sold).

□ CNY 900 billion (USD 132 billion) will be spent over three years.

□ It would kill several birds with one stone: it boosts construction investment, it saves the real estate sector, it triggers large-scale demand for steel and cement, and it enables China to properly urbanize.

□ The aim is to provide subsidized housing for migrants to cities. If successful, this new policy would change the shape of urban China, allowing migrants to move permanently to the cities rather than temporarily sharing dormitories with others.

□ The policy also has the benefit of serving up some demand for steel, cement and construction workers.

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Floor Space Started and Sold of Residential Buildings

0100

200300

400500

600700

800900

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Space million sq.m

0

10

20

30

40

50

60

Growth rate %

Floor space started Floor space sold Floor space started Floor space sold

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Rural Infrastructure Investment

□ Rural infrastructure investment, which includes things like irrigation, roads, and electrification of villages.

□ A large chunk of this funding is coming from central government nowadays.

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Transport Infrastructure Investment

□ Transport infrastructure includes railways, roads, airports, and the power grid.

□ CNY 2 trillion for railway infrastructure.□ Total CNY 5 trillion investment over

three to five years.□ It will be extremely infrastructure-heavy.

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Length of China’s Railways and Highways

0123456789

10000 km

Railways Highways

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R&D and Industrial Restructuring Investment

□ This segment is unlikely to attract much funding.

□ There are still more problems for industrial restructuring funding and other related institutional constraints.

□ How to increase labor productivity growth?

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R&D Expenditure and Its Ratio to GDP

050

100150

200250

300350

400450

2001 2002 2003 2004 2005 2006 2007 2008

billion yuan

0.00.2

0.40.6

0.81.0

1.21.4

1.61.8

R&D expenditure Ratio to GDP

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Target for Manufacturing Adjustment

Industry

Share of manufacturing

output (%)Labor (2007)

2001 2007(10000 persons)

share (%)

Textile 6.67 5.30 626.26 9.14Apparel 3.08 2.15 414.19 6.04Leather products 1.86 1.46 256.98 3.75Chemical industry 7.47 7.58 380.28 5.55Drug 2.42 1.80 137.34 2.00Steel 6.76 9.53 304.43 4.44Machinery 6.94 8.20 677.22 9.88Transport equipment 7.67 7.68 408.59 5.96Electrical machinery 6.49 6.79 449.15 6.55IT & Electronic

products 10.65 11.09 587.92 8.58

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Rural Income Support

□ This policy, including boosting grain procurement prices, and other subsides, including rural low-income payment.

□ As grain and meat prices fall, the ministry of finance is looking as spending much more here.

□ The package also includes unspecified measures to boost bank loans to government-sponsored projects, rural infrastructure, SMEs, mergers, and consumers. This is obviously not a fiscal item.

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Per capita income of rural household (2007)

By Income Quintile

LowLow middl

eMiddle Upper High

Per capita annual

income (Yuan)

2555 3718 5042 6798 12927

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Where is the GDP Impact of This CNY 4 Trillion?

□ It is not likely to be bigger than 2 pps of real GDP growth.

□ Analysts have assumed that the CNY 4 trillion is all government investment.

□ All the money goes into fixed capital investment.□ What can be learnt from China’s historical experie

nce?

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Growth Rates of Three Components of GDP

　 ConsumptionHousehol

dGov. Capital

Net export

s

2000

10.57 9.39 14.18 5.74 2.42

2001

8.72 7.32 12.79 14.14 2.13

2002

7.20 6.82 8.24 14.57 2.57

2003

8.03 8.11 7.82 22.82 2.19

2004

12.37 12.32 12.54 23.60 2.55

2005

12.40 11.57 14.68 16.33 5.42

2006

12.87 12.50 13.86 16.95 7.53

2007

16.14 15.96 16.63 16.72 8.30

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Industrial Output and Labor growth

0

10

2030

40

50

6070

80

90

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

million person

-25

-20

-15-10

-5

0

510

15

20

growth rate %

Industrial labor Industrial output Industrial labor

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Number of new students enrollment

0100200300400500600700800900

1000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

10000 persons

High education High school Vacational secondary school

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E. 2009-2010: Looking for the Future?

• Impact of Fiscal Packages on Economic Growth

• High Pressure on Job Creation

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Can China keep its high economic growth rate?

0

2

4

6

8

10

12

14

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

%

Growth rate

!

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Thank You!