China needs an economic stimulus plan

By Li Hong (chinadaily.com.cn)
Updated: 2008-10-21 12:40

With China's economy heading into an alarmingly precipitous slowdown in the July-September period, Beijing needs to consider immediately implementing an extensive stimulus plan to prevent the world's largest developing economy from grinding into the ground.

The grim fact that China's gross domestic product, a prime gauge of a country's economic performance, slipped to 9 percent for the year's third quarter from 10.6 percent in the first three months of 2008 and 10.1 percent in the second quarter, has appalled many. Officials and economists here had expected a rise of more than 9.5 percent.

Only through increased government spending, by building high-speed railways, expressways, tunnels, seaports and airports, urban subways and bridges, by erecting dams and solidifying river banks, investing in more affordable rural and urban homes and other infrastructure projects, can China prevent a lull in market demand for crude, steel, cement, timber, and all other commodities, and inspire expenditure in other fields, and enable the world's third largest economy to sizzle up again.

Economists hold the consensus that by ensuring an annual 9 percent GDP growth at the least, the country will have sufficient jobs for the needy, and maintain social tranquility or harmony.

With a fiscal surplus and a world record US$1.9 trillion in foreign exchange reserves, Beijing is also capable of drawing up a powerful stimulus plan, and stepping up spending to avoid a steeper slowdown, and do its share to lessen world doubt of growth.

Some advocate the Chinese central government should be more vigilant against the gradual negative impact that a worsening world financial crisis will bring. They caution that looming economic contractions in the United States, Japan, Britain and many other countries will inevitably drag down China's, as its coastal export-oriented labor intensive processing industry will wither. Westerners are now snapping shut their pockets and not buying.

The State Council, headed by Premier Wen Jiabao, held an emergency meeting on October 19 to probe measures to rejuvenate the anemic economy. It is widely believed the central bank will cut interest rates further to spur domestic consumption, do away with taxations on house purchases to re-ignite a sales boom, and give more tax breaks to exports of shoes, textiles and electrical applicants and machinery in order to throw a lifeline to those businesses mired in financial straits.

A rising chorus says the country could count on boosting domestic consumption to cushion the effect of plunging external demand. Many beat their drums, saying that China still has ample domestic demand to tap.

Not really. Although the better-off urban middle class is purchasing more, the country's 750 million or so rural inhabitants remain relatively in poverty, seriously restricting their spending. The government faces an uphill challenge to narrow the inequality of urban and rural wealth.

On the other hand, our culture has ingrained in our blood that we must always be thrifty, and save for the unknown, for the future, and for our children. Even though in the past 10 years, the government has done a lot to establish a welfare system to ensure our medical care and retirement nest eggs, many uncertainties, including the rising bills of our children's education, and the increasing costs of oil, food and future inflation worries, will keep us from spending freely, the way our American counterparts did before the financial crisis.

The benchmark yearly deposit rate of less than 4 percent, far lower than the inflation average of 7.0 percent for the first nine months this year, has failed to thwart banks' savings from mounting. This shows China still can't shake off its saving mentality. It would probably need another generation to change this, as the consumptive-prone "Only Children", born in 1980s and 1990s, have a greater say on family finances, who will take over from the "Baby Boomers" of the 1960s and 1970s, to which I belong.

The time of a generation, at 20-25 years, will prove to be the most important time window for China's modernization. If the government doesn't want - and it shouldn't - China's 30 years of annual 9.8 percent healthy economic expansion from 1978, hiccupped by a sudden slowdown, it is imperative to launch an economic stimulus plan and kick off fiscal spending.

How much? 500 billion to 800 billion yuan will be appropriate.

To contact the writer: lihong@chinadaily.com.cn