Yuan Watch : 'Numbah' gazing

November 30,2008
by CSC staff, Shanghai
chinastakes.com

China's massive economic stimulus package is, unsurprisingly, turning out to be less effective than expected. After the announcement of the 4 trillion yuan plan, it was predicted by many that its contribution to economic growth next year would be 2 to 3 percentage points. Now, the National Development and Reform Commission (NDRC) says that the investment plan may boost economic growth next year by 1 percentage point.

In November, economic indicators declined further. Many economists believe Beijing is readying more measures to stimulate the economy.

Li Huiyong, chief macroeconomic analyst in Shenyin & Wanguo (S&W), a Chinese securities firm, told this reporter that it is impossible that the 590 billion yuan is all stock investment. According to their calculation, among this year's total fixed asset investment, investment from the central budget will reach 750 billion yuan. "But it is also impossible that all of that investment is incremental. The country's GDP is about 28 trillion yuan this year and 1% is only about 280 billion yuan."

Stephen Green, chief economist at Standard Chartered Bank, predicted that one third of the central investment is to be incremental and the rest is stock.

In order to get results as soon as possible, some projects under construction and those having passed preliminary approval have been injected into the investment plan, the construction of the “old faces” being sped up and the new projects started ahead of schedule.
Li Huiyong noted S&W’s forecast figures, including for fixed-asset investment growth, fiscal revenue, industrial added value, price index data, and so on, are all declining. Stephen Green also told this reporter that economic growth in the fourth quarter will continue to slow and that some indicators will sharply decline.

If the 4 trillion yuan stimulus plan can spur economic growth by only a percentage point next year, economic growth may not achieve Beijing’s goal -- 8% economic growth next year is thought to be the bottom line. Taking into account further economic deterioration and the need to maintain growth, the government will have to further intensify its efforts to stimulate the economy. Zhang Ping said: "We will take various measures, including policies to encourage employment.”

Among the three options of fiscal, monetary, and exchange rate policy, decision-makers have operational space in monetary policy and exchange rates, with less maneuver room for fiscal policy.

Stephen Green predicts that by the second quarter next year, China's deposit and loan interest rates will be 160 basis points under the current rate, and the "most liberal" monetary policy is likely to be reached. But it takes time for the monetary policy to take effect, only six months to a year after the most difficult times will companies gain support from the relaxation of monetary policy.

As to exchange rate policy, Li Huiyong suggested that in view of the sharp currency depreciation in neighboring countries, appropriate depreciation of RMB could be considered in order to maintain the competitiveness of China’s exports.