Chinese Government Rolls Out Sweeping Fiscal Stimulus Package to Bolster Growth

Major stimulus measures announced by the Chinese government include a sweeping export tax rebate hike and a new state infrastructure plan that were designed to prop up export and investment growth. According to data released on Monday, overall growth of the Chinese economy in the first three quarters weakened to a four-year low of 9.9%, as export growth softened to 22.3% year-on-year (y/y)—down by 4.8 percentage points from the corresponding period of last year. Fixed-asset investment (FAI) rose 27% in the first three quarters, accelerating slightly from a 26.3% gain for the first half and from a 25.7% rise for the corresponding period of last year, thanks to increased government spending in infrastructure projects in the third quarter. Nevertheless, FAI growth in real terms has actually decelerated, considering that China's FAI price index rose 10.3% y/y during the first three quarters.

Tax Rebate Rates Raised for a Quarter of China's Exporting Goods

The Chinese customs and taxation authority announced yesterday it will raise the export tax rebate rates for the country’s major exporting goods such as textiles, apparels and toys to counter the current export downturn. The rebate increase will affect 3,486 exporting items, 25.8% of the country’s total exporting goods, effective 1 November. For textiles, apparels and toys, the rate will be raised to 14%, according to a statement released by the Ministry of Finance (MOF). The rebate rate for certain plastic products is raised to 9% and that for certain furniture to 11% or 13%. The rebate increase has been introduced to help labour-intensive firms to counter the current operating difficulties brought forth by the export downturn, and to prevent a further slip of export growth, said a MOF spokesperson. The MOF said that a further slowdown of export growth is likely if no preventive measures are taken. This is the second time this year that the Chinese government has raised the export tax rebate rates, although the latest one is much larger in scale compared with the one in August—which only affected textiles and apparels.

More Infrastructure Projects in the Pipeline

At a meeting yesterday, the State Council also discussed a plan to accelerate the construction of major infrastructure projects, approving the construction of an unspecified number of highways, airports, nuclear stations and other projects. In the meantime, the construction of the central and eastern routes of China's massive water diversion project, which channels water from water-rich southern China to the parched northern regions, will also be accelerated, according to the State Council decision. In a meeting held last Friday, the State Council also called for speeding up the reconstruction of the quake-hit areas in Sichuan, Gansu and Shaanxi provinces, as part of the plan to shore up investment growth. According to the latest official data, planned investment for newly-started projects only rose 1.7% y/y in September, despite a 27% FAI growth for the first three quarters.

A Double-Digit Increase of State Purchasing Prices for Grains

China's top economic planning agency announced Monday a drastic increase of the minimum purchasing price for wheat from next year, by as much as 15.3%. There is also going to be a substantial increase of the purchasing prices for rice, said the National Development and Reform Commission (NDRC) in a statement released on Monday. In the meantime, the NDRC has also announced plans to stabilise prices for fertilisers and other agricultural means of production, in a bid to ensure that the grain price increase will not be eroded by input price increases and therefore will translate into real income gains for farmers. This is considered an important move made to shore up domestic demand, as sluggish rural income gain over the past few decades has been a major constraint on consumer spending growth in China.

More to Come?

The string of stimulus measures announced over the past two days has fuelled speculation over the introduction of more aggressive policies in the coming months, which may include a further expansion of the value-added tax (VAT) reform and possibly also the launch of a one-trillion-yuan economy housing fund. In China's north-eastern and central regions as well as the quake-hit zones, a new VAT scheme has already replaced a double taxation system that was introduced in the 1990s to curb capital spending. The government has long promised to expand such a scheme to cover all Chinese regions in the future, with many believing the current slowdown offers great timing for the implementation of the plan. In addition, an economy housing fund—jointly funded by the national social security fund, the Ministry of Finance and the housing provident fund—is also under discussion, according to domestic media reports. The fund will be used to invest in economy housing development, which serves the double purposes of driving up investment growth and absorbing the excess capacity of steel, cement and power industries.

Outlook and Implications

The introduction of this major fiscal stimulus package signals that the Chinese government has officially shifted to a policy mix of fiscal expansion and monetary easing, with the Chinese central bank having already slashed the benchmark interest rates twice since last month. The continued easing in consumer price inflation, a relatively high interest rate resulting from the aggressive tightening last year, as well as a sound fiscal position of the central government, has left much room for conducting such a policy mix. The consumer price inflation already eased for five consecutive months, from 7.7% y/y in May to 4.6% y/y in September. On the fiscal front, the Chinese government reported a huge fiscal surplus of 1.25 trillion yuan during the first nine months, despite a gradual deceleration of fiscal revenue growth over the past few months.