China: Emerging Details of the 'Radical Stimulus Package'

China's State Council unveiled a "radical stimulus package" Nov. 9 aimed at investing 4 trillion yuan (US$586 billion) into every corner of the country. Since then, rumors have been flying over the details of both the package and the source of its funding. The 10-point package outlines a wide range of major infrastructure projects and social safety nets, few of which amount to true short-term economic stimulus — instead they are aimed at development whose benefits will take years to sink in. The central government's plan for funding the stimulus package is beginning to emerge from the confusion of conflicting reports and speculation. First, the government will float 1 trillion yuan (US$146 billion) worth of new construction treasury bonds, with 500 billion yuan (US$73 billion) scheduled to be sold in each of the next two years. This could bring the budget deficit up to 2.5 percent of gross domestic product in 2009 and 2010. Responsibility for the remaining 3 trillion yuan (US$438 billion) of the total package will fall to the provinces, mainly through their own budgets and cheap (subsidized) loans provided by the nation's major banks. So far, the People's Bank of China has asked the national banks to contribute a tiny 100 billion yuan (US$14.6 billion) in loans for infrastructure projects, but this is likely only an initial push. If the State Council approves the provinces' right to issue their own bonds, then this too could provide funding, though it will take time for this mechanism to be operable and for provinces to find markets for their bonds. As for the actual projects included in the program, a cacophony of proposals and declarations has poured forth from state organs in recent days after Premier Wen Jiabao urged government ministries and provinces not to delay. Moreover, the stimulus package contains a cobbling together of not-so-recent infrastructure proposals as well as fiscal and monetary policy actions that have occurred since September, when the financial crisis first began to affect China. It is therefore not entirely clear which of China's recently announced initiatives are properly part of the stimulus package and which are only coincidentally or tangentially related. And it is also not clear which projects will be managed by government ministries and which by provinces. Nevertheless, the current tally of projects included in the stimulus package, culled from state media, probably accounts for three-fourths of the total package, and looks something like this:

The Ministry of Housing and Urban-Rural Development is expected to receive 900 billion yuan (US$131.3 billion) over three years, beginning with 100 billion yuan (US$14.6 billion) in 2008, to build 4 million low-rent houses and repair 2 million makeshift shelters.
The Ministry of Transportation is expected to receive 129.8 billion yuan (US$19 billion) to build a highway on the eastern coast and an electrical railway. However, before the stimulus package was announced, the transport ministry discussed a projected 5 trillion yuan (US$729.5 billion) renovation of roads, railroads and ports over the next three to five years. It is not yet clear what the total investment in transportation will be, though the enormous initial proposal suggests it could be much bigger than the currently allocated sum.
More than 200 billion yuan (US$29 billion) will be allocated for power plants, including several nuclear plants, and an east-west natural gas pipeline.
The Civil Aviation Administration of China will receive 250 billion yuan (US$36.6 billion) in the next two years.
The Ministry of Water Resources will receive 20 billion yuan (US$2.9 billion) for conservation and irrigation projects.
The National Development and Reform Commission is set to distribute 100 billion yuan (US$14.6 billion)
Value-added taxes worth 120 billion yuan (US$17.6 billion) for businesses will be cut. Export tax rebates have been expanded to cover up to 30 percent of Chinese export goods, and some excise taxes have also been slashed.
The People's Bank of China will offer 100 billion yuan (US$14.6 billion) worth of loans. China Development Bank will offer 70 billion yuan (US$10 billion), and China Construction Bank will offer 50 billion yuan (US$7.3 billion). Another 130 billion yuan (US$19 billion) will go to recapitalize the Agricultural Bank of China, for a total of 470 billion yuan (US$68.8 billion) spent on finance.
Natural disaster reconstruction will receive 300 billion yuan (US$43.7 billion).
Manufacturing will receive 208.9 billion yuan (US$30.6 billion), plus 40.7 billion yuan (US$6 billion) for high technology products.
Agriculture will receive 97.5 billion yuan (US$14.2 billion).
Social services will receive 96 billion yuan (US$14 billion) for programs such as health and education.
Urban infrastructure projects will receive 65.9 billion yuan (US$9.6 billion)
Environmental initiatives will receive 12.2 billion yuan (US$1.78 billion).

The striking thing about the above list is that a remarkably small portion of the money is dedicated to true economic "stimulus." The loosening of monetary policy and easing of regulations on lending, plus tax breaks for exporters, will provide relief relatively quickly. Some affected social groups — the urban poor, farmers, migrants and the unemployed — will receive direct transfer payments. And the massive 900 billion yuan (US$131.3 billion) that the central government is devoting to building new housing for the poor will benefit the construction sector and boost employment relatively quickly. But otherwise the stimulus plan contains major infrastructure projects that will take years to get going. And since it is relying in great part on new government bonds — and in the case of the provincial governments, the legal authority to issue bonds does not yet exist and cannot even be legislated until March — the plan is debt-driven and therefore long-term by nature. It therefore appears that with the "stimulus" plan, China is using the occasion of the global recession to launch long-anticipated reforms — some planned since at least last March — in far-flung regions, as well as a broad strategic development plan, ultimately aiming to generate homegrown demand and wean the Chinese economy off export dependency. What China is not doing with the stimulus program, at least so far as is apparent from the details that have been made public, is electrifying the sectors that are becoming sluggish. Nevertheless, STRATFOR fully expects a real stimulus plan to emerge in the coming weeks or months, targeting manufacturers and the export sector more directly so as to prevent them from collapsing under the pressure of the global situation and triggering a wave of unemployment and even social unrest. After all, the country's top leaders and ministers have not yet held their annual economic meeting, which is expected to take place later in November. But because China has chosen to fund its major development and infrastructure projects mostly through deficit spending, it will likely be able to dip into its vast hidden stores of cash to provide instant relief to struggling sectors of the economy. Beijing's plan also seems unlikely to have a significant impact on Chinese purchases of U.S. treasury bills, and China has little interest in attempting to sell any of its $1 trillion worth of U.S. debt. The implication is that the Chinese currently consider maintaining economic relations with the United States more important than achieving short-term stimulus in their own economy.