China aims to boost consumption

I never thought so-called RMB4000 billion stimulus plan has any meaningful points to current painful China economy, but this time, China government seems to be on the right track.

China’s economic policymakers meet towards the end of every year to establish a broad agenda for the coming 12 months. Yet this year’s conference, which begins on Monday, December 8, is likely to focus on specific policy measures.

When the Chinese government launched a fiscal stimulus package a month ago, it was more a statement of intent than a battle plan. Officials wanted to send a signal that they were taking action.

The “central economic work conference”, as the meeting is known, will give leaders a chance to refine and potentially expand spending plans for the next two years. The government has indicated it will introduce measures to boost consumption.

The initial announcement of the fiscal stimulus was rushed out, officials have acknowledged, because growth in the economy was slowing rapidly. And since the first announcement, the economy appears to have deteriorated further, including a drop in car sales and electricity production in November and reports that exports had decreased for the first time in nearly a decade.

One of the main criticisms about the fiscal stimulus plan is it focuses too heavily on infrastructure. According to the commission, about 80 per cent of the Rmb4,000bn ($581.8bn) investment over two years will be in roads and railways.

Ha Jiming, economist at China International Capital Corporation, an investment bank, said that infrastructure spending would not have as big an impact as it did after the 1997 Asian financial crisis because facilities were much better developed than a decade ago and state-owned companies were no longer such an important part of the economy.

If not carefully controlled, economists warned, infrastructure spending could also stimulate even more investment in the manufacturing sectors which are suffering from over-capacity, such as steel.
Given the concerns about the efficacy of massive infrastructure investment, there is widespread speculation that the authorities will do more to try to boost domestic consumption. That could include raising the threshold for income tax and help for low-income families, as well as accelerating spending on pensions, education and healthcare.

There appears to be a growing consensus within the central government that China has to stimulate domestic consumption more aggressively. The authorities are also under pressure to boost the stock market.

In the fact, this worldwide financial crisis offers an opportunity for China government to adjust the economic development path and solve the deep-rooted social issues. It’s hard to wheel a big train, but we have to.