Are You Feeling Stimulated?

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With companies and economies alike feeling the Crunch, many have been looking to China as a source of economic growth – but China has also been seeing the impact of the global slowdown, and anecdotal evidence suggests that some sectors are suffering.

The Chinese government has been trying to curb excessive growth over the past couple of years, and brought in a number of measure to cool the economy. Now the pendulum is swinging the other way as they try to ensure there is enough growth to soak up the workers. Talk of growth falling below 8 percent (in the more pessimistic projections) worries them (AFP reports a government analyst is hoping for 10 percent). While the BBC reports from President Hu himself:

    “External demand has obviously weakened and China’s traditional competitive advantage is being gradually weakened,” Mr Hu said, according to the official People’s Daily newspaper.

    “Whether the pressures can be turned into a driving force and the challenges turned to opportunities … is a test of our ability to control a complex situation, and also a test of our party’s governing ability,” he added.”

Toy factory riots and taxi driver strikes could be a sign of things to come.

Enter the Stimulus Package. According to China Daily:

    “The State Council, China’s cabinet, recently hammered out the most courageous economic stimulus package, involving a huge investment of up to 4 trillion yuan, or $586 billion by the end of 2010, in a bid to boost the waning domestic demands and halt the slowing economic growth form slipping further to its ebb.

    The package, with 10 concrete measures highlighted, is not only intended to ensure a steady economic growth, but also weigh in preference to investing in the improvement of people’s living standards, like solidifying Chinese people’s social security guarantees. But the problems that could pop up with the emergence of the ambitious fiscal spending plan may include: How to make the immense cake of 4 trillion yuan? And make it efficiently to both arrest the sagging economy from worsening, and improve the people’s livelihood?

    Some analysts say that the 4-trillion-yuan package will come from the three sources, namely, coffer revenues of the central and provincial governments, and contributions from the society at large. The Finance Ministry disclosed that the central government’s input in 2007 had already amounted to 2.78 trillion yuan, up 35.6 percent over the previous year. Investments from the central government, dubbed as the most reliable financial supplies, have long acted as a strong impetus to China’s robust economic growth for the past three decades when the country adopted reform and opening-up policies.”

The package has been generally well received and, as the Wall Street Journal points out, it could help to generate domestic consumption, providing long-term opportunities for international business:

    “The real potential for fiscal spending to have an impact on consumption, though, is through social spending. One element of the policy package focuses on health and education spending; another captures social security, pensions and income support. Spending in these areas not only supports public consumption directly, it stimulates private consumption as well by relieving households of the need to save to finance retirement or self-insure against mishap…

    …China’s stimulus package is good news for the world at large. More Chinese consumption means more demand for foreign goods and less export competition for producers abroad. As China’s growth is driven more by absorbing domestic resources into the provision of social services not only are incomes generated, but human capital formation takes place contributing to productivity gains and income growth into the future. That means a growing consumer market to be tapped in the years ahead.”

Stimulating times indeed – but the risks remain, and businesses cannot afford to hunker down and hope for the best. Strategy reviews (and big decisions) will have to be ongoing as the crisis – and the package – unfold.

See news sources:

    China to grow 10 percent in 2009 despite global crisis: government …
    The main reason is China’s ability to provide its own growth momentum, Xinhua news agency reported, citing Zhang Liqun, an economist with the Development …

    Economy warning from China leader
    BBC News – UK
    By James Reynolds China’s President Hu Jintao has warned of the effects of the global financial crisis on his country. Mr Hu gave his warning at a meeting …

    How to make the cake of $586 billion in China?
    China Daily – China
    By LiHong mei ( The State Council, China’s cabinet, recently hammered out the most courageous economic stimulus package, involving a huge …

    China’s Stimulus Will Work
    Wall Street Journal – USA
    And although it might take some time to take effect, it could help usher in important changes in China’s economy. If China is going to “rescue the world” …

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