Chinese government having problems funding stimulus package

Sources

Beijing offers just quarter of stimulus funds, Financial Times

China fiscal package raises questions, Financial Times

Testing times as China’s economy turns inwards, Financial Times

China’s fiscal stimulus package appears to be dramatically underfunded. The Chinese government announced on Friday that it would put up only about a quarter of the planned Rmb4,000bn that is to be used to boost a slowing Chinese economy. China intends to rely on its local governments, state-owned banks and companies to come up with the remainder of the funding. The government itself will increase spending by Rmb1,180bn in the next two years.

China announced the stimulus package in response to a slowing economy caused by the current financial crisis. Since that announcement there have signs that the Chinese economy is slowing faster than expected. China had hoped that increased spending, which is part of the stimulus package, would provide an extra 7 percent of gross domestic product each year for the next two years. Economists, however, have expressed doubt about the effectiveness of the stimulus package and the likelihood that local governments, banks and companies can come up with the rest of the funding. Without the remainder of the funding, economists think it unlikely that China will be able to achieve as large a fiscal boost as it is hoping for.

The country’s economy, like the economies of most of the rest of the world, is increasingly feeling the effects of the financial crisis. Local governments are facing cash shortages because the weak property market has decreased revenues from land sales and they aren’t allowed to sell bonds to finance new investments. China has also seen declines in industrial production, imports, tax revenue, and house prices. Additionally, exports are responsible for a third of China’s economic growth, but the financial crisis has caused a sharp decrease in demand for Chinese products. Economists predict that if the stimulus package fails, China could experience up to a 5 percent drop in economic growth.

Questions

(1) What impact will a slowed Chinese economy have on the global economy?

(2) What else can China do to prevent its economic growth from slowing further?

(3) Should China be depending on its local governments, state-owned banks and companies to come up with the majority of the funding for the stimulus package or should the Chinese government contribute and intervene more heavily to shore up its economy?