Chinese fiscal stimulus plan, Chinese communist party 60th anniversary, China’s New Deal
Chinese building workers construct the foundation for a section of the Beijing-Shanghai Express Railway in Changzhou city, Jiangsu province, Nov. 10, 2008. (AP)

China’s Economy Banking on Infrastructure

December 03, 2008 07:57 AM
by Anne Szustek
To stimulate the country’s economy, China has approved billions of dollars in New Deal-style spending. Does this mark a turn in the country’s financial policy?

China Invests in Infrastructure

As part of China’s recently approved 4 trillion yuan ($584 billion) fiscal stimulus package, the country is giving the green light to 550 km (311 miles) of new highways and pushed ahead an additional 15 infrastructure projects.

The first wave of investment is to include 100 billion yuan to be doled out during this quarter, including 15 billion yuan exclusively for railway projects.

According to China’s National Development and Reform Commission, the rail projects should generate 500,000 jobs, and create demand for 10 million tons of cement and 1.6 million tons of steel.

The country’s second-largest bank, China Construction Bank, also plans to ramp up lending 13 to 15 percent from 2008 to next year, for some 400 billion to 500 billion yuan in new lending. Half of the loans will go toward infrastructure projects.

Jing Ulrich, chair of China equities at JPMorgan Chase & Co. in Hong Kong, said in an interview on Bloomberg TV, “The government is doing whatever it can to stimulate the domestic economy…Sentiment is still very fragile.”

China, the world’s fourth-largest economy, has not been immune to the international financial crisis. Growth in the emerging market nation has tempered on the back of dwindling demand for exports and a slowdown in investment. The World Bank estimated last week in its latest China Quarterly Update that China’s economic growth next year could decelerate to 7.5 percent in 2009 from 11.9 percent in 2007. Growth of at least 8 percent is considered the baseline for China to sustain jobs and stave off social unrest, Asia Times reported.

The world is watching to see how China’s economy will weather this economic crisis. “In the current circumstances, we must focus even more strongly on economic development,” Chinese President Hu Jintao told the Communist Party at a meeting last week.

Opinion & Analysis: China—Again—Seeks to Spread the Wealth

At last week’s meeting of China’s Communist Party, the party’s political committee stressed the continuation of an “active” fiscal policy as well as “moderately loose” monetary policy. Part of the Communist Party’s recession-fighting arsenal includes a policy measure not associated with Marxist ideals: tax reduction.

The Communist Party political committee also called for rural development and to concentrate on bolstering agriculture, a policy hallmark of Hu’s since entering office in 2003. Until recently, however, the party has focused on economic growth as the country’s main goal, Time magazine reported.

"I think in a decade, we'll be looking back at this moment and saying, 'This was it. This was when things really changed and China's economy transitioned from externally, export-oriented to an internal focus,'" Ben Simpfendorfer, an economist in Hong Kong with the Royal Bank of Scotland, told Time.

Whether China’s fiscal stimulus will spur growth in China’s underdeveloped regions lies in its implementation—and how quickly it gets pushed through. "My concern is that the contraction in demand will take place before the fiscal policies have time to take effect,” Simpfendorfer continued.

China’s rural areas have been ravaged by severe natural disasters such as May’s 7.9 earthquake in Sichuan province. This, on top of remigration of rural workers from cities back to their villages, could set off social turmoil, if not merely disgruntlement. Those already in rural regions stand to lose their jobs: As many as 2.5 million laborers in the Pearl River Delta are expected to be unemployed in the next few months, Time reported.

Others doubt that the infrastructure stimulus money will go to crucial projects instead of showy architecture. "Without proper supervision at the local level, the investment of so much money over a short period of time could leave the country littered with 'beauty show' and 'face projects' of little value to anyone but officials themselves,” China Times was quoted as reporting by Asia Times.

For this reason, some analysts within the country say the stimulus could work better to bolster social spending. Michael Pettis, finance professor at Beijing University, told Asia Times, "There is no doubt that an increase in the investment in health and education would contribute to boosting domestic demand. If the New Deal leads to aggravation of income inequality, then it doesn't solve any of China's problems.”

Historical Context: America’s New Deal

In November 1932, Franklin Delano Roosevelt was elected president of the United States. His campaign promised Americans a “New Deal” that would restore the country to prosperity and fix the damaged financial system of the day. The New Deal was centered on the notion that the government was required to get the country out of the Depression. Immediately after being elected, “Roosevelt’s administration saw the passage of banking reform laws, emergency relief programs, work relief programs, and agricultural programs,” writes the Library of Congress.

Related Topic: States push for federal infrastructure funding

Individual states, facing their own budget problems, are hoping that they can tap into President-elect Barack Obama’s proposed two-year “Economic Recovery Plan” to bolster state programs. During a press conference on Nov. 24, during which Obama named Tim Geithner, head of the New York Federal Reserve, as treasury secretary, he mentioned the plan but didn’t give concrete monetary figures. Before the election, though, Obama mentioned a need for $25 billion in general state aid and another $25 billion to fix infrastructure.

Already foreseeing steep budget shortfalls during fiscal year 2009, the National Governors’ Association has drawn up a $126 billion budget for “potential recovery programs.” Included in this is $57 billion for infrastructure plans, including $27 billion for highway and transit upgrades; $6 billion for wastewater treatment and drinking water projects; and almost $5 billion for affordable housing.

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