China’s Economic Stimulus Programme – And What We Know About It

Barbara Unmüßig is Co-President of the Heinrich Böll Foundation.

July 20, 2009
By Barbara Unmüßig
Dieser Artikel existiert auch auf Deutsch.

By Barbara Unmüßig

Sharp declines on the stock market and heavy losses on investments in US and EU banks in the billions of euros show that China also made risky transactions on the international financial markets. The bulk of China’s currency reserves is invested in fairly secure US bonds. The worst was prevented by state control of capital transactions and the solid financing of Chinese banks and most companies.

Nevertheless, China is suffering massively from the financial crisis. The slump in demand from the United States has hit China's export sector hard, and this sector is responsible for forty percent of China's gross domestic product. “China's inefficient growth model and unbalanced economic structure make the PRC’s economy vulnerable" says Yu Yongding, Director of the Institute for World Economics and Politics at the Chinese Academy of Social Sciences. The opportunity has now come to push forward a long-overdue reorganization, to develop the domestic market and focus on creating more value in the production of exports.

In mid-March, the World Bank corrected its prognoses for China’s economic growth down to a mere 6.5 percent. The Chinese leaders also no longer count on a double-digit growth rate, though they do promise that GDP will rise by eight percent in 2009. China needs this growth to create additional jobs. Urban unemployment is officially at 4.2 percent, but other sources estimate it at nine to twelve percent. One and a half million university graduates are jobless, and seven million more will flood the labour market in 2009. What’s worse, according to official statistics, is that 26 million migrant labourers have lost their jobs in factories making commodities for export and can no longer earn a livelihood in their villages. This threatens the social peace. Last year already saw violent protests in front of factories.

During the boom years, too little was invested in agriculture and rural infrastructure. Millions of farmers lost arable land to industrial zones, often without having received sufficient compensation. Soil and water contamination, erosion, and flooding are further problems. Since 2005, the leadership under Hu Jintao has promoted the development of rural areas, exempted farmers from taxation and abolished dues for the nine years of mandatory schooling. Now, however, the economic crisis has arrived at the countryside in the form of a crisis in purchasing power, as millions of migrant labourers send less or no money home.

China’s household appliance subsidy program in rural areas is meant to provide a short-term remedy. Consumers will receive 13 percent of the purchase price of televisions, washers, air conditioners, microwave ovens and mopeds from the government in cash. The government will spend 1.7 billion euros on this program in 2009 to deal with electronics and domestic appliance producers’ excess capacity. This might appear rather helpless In light of exports that have fallen by 25.7 percent as compared to the same month last year, but China's government has other cards up its sleeve.

In November 2008, it announced a 458 billion Euro economic stimulus program. The largest payments are slotted for infrastructure, new housing and the development of rural areas, including rebuilding the areas devastated by the earthquake in the Sichuan Province. Forty billion euros are to be allocated for environmental protection and energy efficiency. The World Resources Institute has praised the stimulus program as a step towards greening the Chinese economy.

Critics inside and outside of China condemn the large percentage of infrastructure projects and the relatively small investment in human capital, however. The most vehement criticism is of the lack of transparency. After the package was announced in November, a national movement was formed to demand that the details be made public on the Internet. The press supported the campaign and a Shanghai lawyer threatened to sue by applying a new law on transparency, should the relevant authorities fail to disclose exact numbers on the use of the funds. Even the state news agency Xinhua supported the movement. In the end, the government agreed to publish the details after the vote in the National People’s Congress.

The annual People’s Congress, China's legislative assembly, met in mid-March. The main issue was passing the budget and stimulus package. More than 400 of the 2898 representatives voted against the package or abstained. This unusually high number of nays within the one-party parliament is possibly a reaction to the lack of transparency. Hu Shuli, Managing Editor of the renowned financial magazine Caijing, praised this year’s assembly for making great progress in the disclosure of the budget but called for many further improvements.

In the first days after the assembly, no details on the stimulus program were released, but the numbers that had previously been made public were updated, showing that criticism of the package had been taken into account: Investments in education and social services were greatly increased. Funds for health care and education were almost tripled – from 4.6 to 17 billion euros. Considerably more money is also to be allocated for research and innovation: 31 billion euros rather than the 18.3 billion euros originally announced. Peking is determined to jump-start the long-term reorganization of the economy, away from the world's workbench and towards a knowledge- and service-oriented economy. Funds for infrastructure and transportation were reduced in order to do so, but they remain the largest item. Funds for environmental protection were also reduced by 40 percent in the revamped stimulus program.

The financial crisis cannot solve China's developmental dilemma. In a crunch, the government will choose the development of its poorest provinces, and the concurrent social stability, over environmental protection. There will be no radical rethinking on this front. However, investments in infrastructure and innovation still provide opportunities for a Green New Deal. The extension of the rail system and the demand for energy and resource efficiency are good initial examples of this, and 24 billion euros are nevertheless still slotted directly for environmental protection.

Now it is not only decisive which concrete measures these funds will be invested in, but whether China will be able to implement the package sensibly. The devil is in the details, Yu Yongding declares. If the stimulus package does not fuel the demand of private households and small business, but only animates provincial governments to make further short-sighted investments, then it will fail.

Even before the People's Congress, the Ministry of the Environment had already announced that it would be issuing green guidelines for direct investment that originates from abroad. In February of 2009 this was down by more than 30 percent from the previous year. As the country with the largest domestic market, however, China will remain attractive to investors and continue to make a significant contribution to global economic development. Whether we can justify this development to future generations depends upon whether we can all make fundamental changes in our consumption and production habits. We have the opportunity.

Barbara Unmüßig

From 1996 to 2001, Barbara Unmüßig chaired the supervisory board of the Heinrich Böll Foundation, and was elected president of the foundation in May 2002. Her numerous contributions to periodicals and books have covered international trade and finance, international environmental issues, and gender policy.