Mainland China, Maximum Effort to Support Growth Content
Sharply slower economic growth and grim export prospects have prompted mainland China to aggressively ease monetary policy and launched a massive fiscal stimulus package to stimulate economic growth in the past month.
The RMB4 trillion fiscal package, to be spent on infrastructural projects, subsidised housing, rural livelihood improvement etc. in the coming two years, is expected to raise the Mainland’s real GDP growth in 2009 and 2010 by two to four percentage points each.
With the impact of the global financial crisis spreading further to the real economy, interest rates could be reduced by another 50 basis points in the first quarter of 2009, while the required reserve ratio could decline to 12% by the end of 2009 from 16% at present. Overall, with the stimulus package in place, there is a good chance for the Mainland to attain a real GDP growth of about 8% for 2009 after an estimated growth of 9.5% for 2008.
The economic downturn and more fiscal spending would lead to a bigger budget deficit, which could reach about 4-5% of GDP in 2009 from about 1.5% this year. But given the Mainland’s strong fiscal position, with an outstanding public debt of only about 21% of GDP in 2007 and the world’s biggest foreign exchange reserves of USD1.9 trillion at the end of September, the country should have little problem in withstanding a temporary deterioration in the government’s account.
Mainland China slashed banks’ lending rates by about one percentage point on 26 November. The cut was the fourth this year and the largest since the 1997 Asian financial crisis. The latest rate reduction, made just 2 1/2 weeks after the Mainland announced a RMB4 trillion fiscal stimulus package, suggested that the central authorities were really concerned about the country’s deteriorating economic conditions.
The one-year loan rate was lowered to 5.58% on November 27, down 1.9 percentage points from its mid-September 2008 level when the Mainland began its latest round of monetary relaxation. Simultaneously, the authorities also reduced banks’ required reserve ratios by 1-2 percentage points to 14-16%, depending on the size of banks. The continued easing of inflation in the last few months has allowed the authorities to relax monetary policies more aggressively. Consumer prices rose only 4.0% in October compared with increases of 4.6% in September and 8.7% back in February 2008 due to falling food prices.
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