Debate Room Part 1: Should China have Another Stimulus Package?


Yes. It could Energize the Faltering Economy

China’s 2008 economic stimulus has led to concerns that if another such package were to be introduced today, it would lead to similar problems of overinvestment, overcapacity, increased social inequality and rising local debts. I, however, feel that these fears are misplaced. Since 2008, the Chinese economy has recovered relatively well. We cannot know how much worse the economy would have fared had we not implemented a stimulus. We need a new government investment in targeted, specific industries to combat the low gross domestic product (GDP) growth rate and rising unemployment.

China’s GDP grew at a rate of 7.6% in the second quarter of 2012, a clear slowdown compared to the 9.5% in the same period in 2011. This is not a healthy sign if we have to maintain the country’s macro-level economic growth. In order to maintain an 8% GDP growth rate, China’s total factor productivity (TFP) needs to be at least 7%. The TFP – an index for measuring companies’ production efficiency – provides the micro-level growth that ensures China’s macro-level economic growth. If there is no new stimulus package, with current levels of export to be maintained for the second half of 2012, China’s GDP growth rate could fall to 7% or lower, which, in turn, could lead to a high unemployment rate and a dissatisfied populace.

A new stimulus package should focus on how to increase the overall wealth and improve the living standards of Chinese citizens. As China moves from exporting labor-intensive products to high value-added products, the government should support companies with research and development costs to increase their global competitiveness.

Specifically, a new government stimulus should target three areas: farm irrigation facilities to benefit farmers and thereby the whole country; upgrade emerging industries such as LED and solar industries; and lastly, highway and railway infrastructure. The last area, although controversial, could help make inroads into underdeveloped central and western China, where products can then be shipped.

Increasing exports to emerging economies, like Brazil and Indonesia, could help China’s growth in the long-term if other global economic conditions are met. But for now, we need a clear strategy for the short-term. I favor government investment over private investment, as any increase in private investments will not be effective to spur economic activity. In addition, a tax reduction or any business tax will not help the companies that are still not profiting.

Some argue that a new stimulus package will add overcapacity, increase production and stimulate corruption, as evidenced by the cement and steel industries overproduction from 2008. With a new stimulus, the government can initiate infrastructure projects to put this cement and steel overstock into use, and no longer approve more projects in the over-stocked sectors.

Some also point to the problem of rising local debt to argue against a new stimulus. I think that a stimulus of RMB 500 billion or RMB 1 trillion should come from the central government (whereas in 2008 half of the stimulus came from the central government and the other half from local governments). If you do a global comparison, China’s government debt ratio is among the lowest, at less than 50%, so central fiscal revenue should be sufficient to support these investments.

While the government has been promoting mass consumption for the past two years, the expectation is premature because we still face the problems of a developing country, including limited access to quality education, medical care, and housing for common citizens. When we compare China’s 2011 GDP per capita of $5,500 to the US GDP per capita of $40,000-50,000, we see why ordinary citizens would rather save than spend. If an average farmer’s monthly income is RMB 1,000, when given an extra RMB 100, consumption will not be his first goal. Targeting the middle class or the top 25% earners of the population is more effective. In addition, when China’s GDP per capita surpasses RMB 10,000, consumption will rise naturally.

Focusing on exports and consumption will not help the Chinese economy in the short-term. Perhaps with a new government stimulus, next year China will recover as an export-driven economy. After three to five years with steady GDP increases, the per capita income could reach $10,000, and only then will consumption drive the economy.

Yu Miaojie About Yu Miaojie

Yu Miaojie is Associate Professor at the National School of Development at Peking University and Advisor to the Ministry of Finance.