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China’s Response to
the Challenge of Global Economic Recession
Prof. Xingmin Yin
School of Economics, Fudan University
December 2009
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Topic
A. Challenges of global economic recession
B. Discussion on China’s major policies
C. 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
4.50
4.00
3.50
3.00
%
2.50
2.00
1.50
1.00
0.50
0.00
2000
2001
2002
2003
United States
2004
2005
Euro Area
2006
2007
2008
Japan
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Unemployment Rate for Major Developed Economies
10.00
9.00
8.00
7.00
%
6.00
5.00
4.00
3.00
2000
2001
2002
2003
United States
2004
2005
Euro Area
2006
2007
2008
Japan
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2008/1/1
2007/1/1
2006/1/1
2005/1/1
2004/1/1
2003/1/1
2002/1/1
2001/1/1
%
2000/1/1
Fed Rate
08/8/11
08/2/11
07/8/11
07/2/11
06/8/11
06/2/11
05/8/11
05/2/11
04/8/11
US
04/2/11
03/8/11
03/2/11
1.00
02/8/11
2.00
02/2/11
3.00
01/8/11
5.00
01/2/11
6.00
00/8/11
2008/8/2
2008/2/2
2007/8/2
2007/2/2
2006/8/2
2006/2/2
2005/8/2
2005/2/2
2004/8/2
2004/2/2
2003/8/2
2003/2/2
2002/8/2
2002/2/2
2001/8/2
2001/2/2
0.00
2000/8/2
2000/2/2
%
1999/1/1
Zero Interest Rates?
Japan
7.00
0.60
0.50
4.00
0.40
% 0.30
0.20
0.10
0.00
Rate
Euro Area
4.50
4.30
4.10
3.90
3.70
3.50
3.30
3.10
2.90
2.70
2.50
Main ref inancing operations %
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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 lowincome 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 expenditure……
□ More taxes have been levied in the past four
years.
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6000
35
5000
30
billion yuan
25
4000
20
3000
15
2000
%
10
1000
5
0
0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Gov. revenue
Gov. expenditure
Gov. revenue growth rate
Gov. expenditure growth rate
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Tax Growth Rates
Growth rate (%)
40
35
30
25
20
15
10
5
0
-5
-10
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Total
Value-added
Business tax
Co. income tax
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Key Infrastructure Investments
Investment programs
Amount,
CNY billion
Roads, airports, waterways etc.
(excluding railway)
2,000
Railways
800 - 2,000
Building of low-cost houses
900
A new policy
Airports
550
This money should be spent
over 2009 – 10.
Earthquake zone
1,000
Total spending in
reconstruction
Notes
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 valueadded 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
Revenue ratio of the central
and local government
Expenditure ratio of the
central and local government
23%
45.90%
54.10%
77%
Central Local
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
60
50
40
30
20
Growth rate %
Space million sq.m
900
800
700
600
500
400
300
200
100
0
10
0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
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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10000 km
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
Length of China’s Railways and Highways
9
8
7
6
5
4
3
2
1
0
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
billion yuan
450
400
350
300
250
200
150
100
50
0
1.8
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
2001
2002
2003
2004
R&D expenditure
2005
2006
2007
2008
Ratio to GDP
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Target for Manufacturing Adjustment
Industry
Share of manufacturing
output (%)
2001
2007
Labor (2007)
(10000 persons) share (%)
Textile
6.67
5.30
626.26
9.14
Apparel
3.08
2.15
414.19
6.04
Leather products
1.86
1.46
256.98
3.75
Chemical industry
7.47
7.58
380.28
5.55
Drug
2.42
1.80
137.34
2.00
Steel
6.76
9.53
304.43
4.44
Machinery
6.94
8.20
677.22
9.88
Transport equipment
7.67
7.68
408.59
5.96
Electrical machinery
6.49
6.79
449.15
6.55
10.65
11.09
587.92
8.58
IT & Electronic products
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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 governmentsponsored projects, rural infrastructure, SMEs,
mergers, and consumers. This is obviously not
a fiscal item.
28
Per capita income of rural household (2007)
By Income
Quintile
Low
Low middle
Middle
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
experience?
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Growth Rates of Three Components of GDP
Consumption
Household
Gov.
Capital
Net exports
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
20
15
10
5
0
-5
-10
-15
-20
-25
growth rate %
million person
90
80
70
60
50
40
30
20
10
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Industrial labor
Industrial output
Industrial labor
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Number of new students enrollment
10000 persons
1000
900
800
700
600
500
400
300
200
100
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
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?
14
!
12
10
%
8
6
4
2
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Growth rate
35
Thank You!
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