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PP RUEHCN RUEHGH RUEHRN RUEHVC
DE RUEHBJ #4178/01 3162232
ZNR UUUUU ZZH
P 112232Z NOV 08
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC PRIORITY 0799
INFO RUEHOO/CHINA POSTS COLLECTIVE PRIORITY
RUEHSS/OECD POSTS COLLECTIVE
RHEHNSC/NSC WASHDC
RUCPDOC/USDOC WASHINGTON DC

UNCLAS SECTION 01 OF 04 BEIJING 004178 
 
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TAGS: EFIN ECON KPAO PREL PGOV CH
SUBJECT: CHINA ANNOUNCES STIMULUS PLAN AHEAD OF G-20 SUMMIT 
 
(U) THIS MESSAGE IS SENSITIVE BUT UNCLASSIFIED. PLEASE 
HANDLE ACCORDINGLY. NOT FOR INTERNET DISTRIBUTION 
 
¶1. (SBU) Summary: In advance of the G-20 summit China's 
leadership on Sunday took the unusual step of endorsing a 
long-anticipated stimulus package before its annual 
economic work conference later this month.  The plan 
emphasizes infrastructure spending, but also includes 
targeted tax reductions, income support, and monetary 
easing.  The announcement estimated the "stimulus package" 
will amount to RMB4 trillion (around USD600 billion or over 
6+% of GDP) over the next two years, and RMB100 billion by 
the end of this year.  Until more details are available it 
is impossible to determine how much of the announced 
spending is additional to what already would occurred.  Tax 
cuts for business and monetary loosening are unlikely to 
spur investment given the deteriorating economic outlook 
and companies' excess capacity, and the continued high 
household precautionary savings.  The government, however, 
appears committed to using fiscal spending to support the 
economy.  Even if they maintain spending growth plans from 
previous years, it should still have a stimulatory impact 
on Chinese domestic demand and investment.  End summary. 
 
An Unusual Announcement 
----------------------- 
 
¶2. (SBU) China's State Council on Sunday released a 
statement announcing general principles that will guide its 
economic policies moving forward.  The announcement, 
several weeks before the annual high level economic work 
conference, showed the leadership's concern about slowing 
economic growth and interest in getting a statement out 
before the upcoming G-20 summit.  Business surveys showed 
rapidly deteriorating sentiment, and although the Chinese 
government has not released its October economic indicators, 
economists that have seen the data say they will show 
marked slowdowns in all areas of the economy. 
 
¶3. (SBU) The announcement was short on details, like most 
State Council documents, but provides approval and guidance 
for the operational ministries to implement programs that 
fit within these guidelines.  The ten approved areas (see 
Annex A) primarily emphasize infrastructure spending, but 
also include targeted tax reductions, income support, and 
looser monetary policy. 
 
"Active" Fiscal "Easy" Monetary 
------------------------------- 
 
¶4. (SBU) The State Council endorsed a "pro-active" fiscal 
policy for the first time since 1998-2004.  The statement 
estimated the Chinese government will inject RMB 4 trillion 
into the economy: around RMB 100 billion worth of stimulus 
will occur this quarter, with the remainder operationalized 
in 2009 and 2010. 
 
¶5. (SBU) Beijing will adopt a "moderately easy" monetary 
policy.  In recent weeks the Central bank has lowered 
lending rates and reserve requirements, and removed loan 
quotas.  Most observers expect additional rate cuts in the 
coming months. 
 
Chinese Economists' Reactions 
----------------------------- 
 
¶6. (SBU) Chinese economists without exception reacted 
positively to the announcement.  Asia Development Bank 
chief economist Zhuang Jian and Development Research 
Council Macroeconomic Research Office Director Zhang Liqun 
hailed the stimulus package.  Qinghua University Professor 
Yuan Gangming felt the measures would "effectively boost 
confidence" and were "released just in time," remarking 
positively on the wisdom of loosening monetary policy to 
support fiscal measures.  This focus on consumer confidence 
was echoed by Beijing University professor Cai Zhizhou. 
Most Chinese economists are still calling for growth around 
8 percent next year. 
 
¶7. (SBU) Tax Research Institute Policy Research Office 
director Zhang Peisen and Chinese Academy of Social 
Sciences researcher Zhang Bin both emphasized the 
 
BEIJING 00004178  002 OF 004 
 
 
importance of VAT reform to boosting domestic demand. 
Zhang Bin also praised the plan to build affordable housing, 
which would stimulate demand while helping ordinary people. 
However, Chairman of the Leading Group on Finance and 
Economics Liu He (who leads preparation of the annual work 
conference) had doubts that cutting the VAT for businesses 
(by rebating VAT paid on purchases of capital goods) would 
spur investment given overcapacity and the deteriorating 
outlook. 
 
Bang or Whimper? 
---------------- 
 
¶8. (SBU) The RMB2 trillion per annum should make up about 
6-7% of estimated 2009-10 GDP.  In the last two years, the 
central government's infrastructure spending accounted for 
about 3% of GDP, with local-level spending making up around 
8% (or RMB3 trillion total, with roughly 40% of spending 
occurring in the 4th quarter). 
 
¶9. (SBU) Absent additional details, it is impossible to 
discern how much of the announced spending is additional to 
what would have occurred.  Based on conservative estimates 
of nominal GDP growth and the long-term trend of an 
increase in the ratio of government spending to GDP, 
overall government spending would have been expected to 
increase about RMB 2 trillion next year. 
 
¶10. (SBU) However, much local infrastructure spending has 
been funded by property sales and state-controlled 
enterprises, so a slowdown in the property and corporate 
investment would have made it difficult to finance 
investments levels of recent years.  Thus, part of the RMB 
4 trillion could make up for shortfalls in local government 
investment. 
 
¶11. (SBU) Given banks unwillingness to lend to small- and 
medium-sized enterprises due to increased credit risks, and 
large enterprises' lack of credit demand, due to excess 
capacity,  looser monetary policy is not expected to boost 
domestic demand significantly in the short-term absent 
significant moral suasion on state banks and enterprises. 
While the government has pressed state-owned banks to keep 
enterprises afloat during previous cyclical downturns, 
which led to a subsequent large accumulations of non- 
performing loans, bankers we have spoken with in the last 
several days (including CCB Chairman Guo, SDB President 
Newman, and GDB President Zink) note that the market- 
oriented corporate governance reforms since the last 
downturn will make moral suasion less effective, and the 
government appears to be focusing more on providing tax 
breaks and subsidies to borrowers. 
 
Comment 
------- 
 
¶12. (SBU) Premier Wen Jiabao noted during financial crisis 
that "confidence is more precious than gold" -- a large 
sentiment-boosting announcement in advance of the G-20 may 
be aimed at shoring up domestic sentiment. 
 
¶13. (SBU) The Beijing leadership, however, is also 
committed to using government spending to stimulate the 
economy through infrastructure spending.  In addition, even 
if the announced "stimulus" is largely a compilation of 
already planned spending increases, the government is 
committing to this in the context of a sharp fall in the 
growth of revenues (which rose only 10% year-on-year in the 
third quarter compared to 33% in 2007 and the first half of 
2008).  Given China's abundant savings, liquid banks and 
low government debt ratio, the central government is in a 
good position to use fiscal measures to contribute to 
domestic consumption and investment.  Regarding timing, the 
government has already developed plans to improve 
transportation networks, build lower-income housing, and 
address China's water and pollution problems; many of 
these programs were delayed in the last couple of years 
while China focused on preparing for the Olympics, and 
Beijing could accelerate implementation without much 
trouble. 
 
¶14. (SBU) However, until details of the recently announced 
 
BEIJING 00004178  003 OF 004 
 
 
spending package are released, and particularly the full 
accounting of the mix of central government verses local 
and state-owned enterprise spending, and the amount of 
additional spending, it will remain impossible to determine 
the economic impact of the package. 
 
Ten Areas for Fiscal Stimulus 
----------------------------- 
 
¶15. (U) Annex A: 
 
-- Housing: build more affordable and low-rent housing; 
speed slum clearance; expand a pilot program to rebuild 
rural housing; encourage nomad settlement. 
 
-- Rural infrastructure: speed rural infrastructure 
construction; improve rural road and power grids; spread 
the use of methane; ensure drinking water safety; expedite 
the North-South water diversion project; reinforce at-risk 
reservoirs; strengthen large-scale irrigation; poverty 
relief projects. 
 
-- Transportation: accelerate transport network expansion, 
including passenger rail links and coal routes; extend 
trunk railways; build airports in western areas; upgrade 
urban power grids. 
 
-- Health and education: improve the local-level medical 
system; accelerate junior high school construction in rural 
western and central areas; build special education and 
cultural facilities. 
 
-- Environment: enhance construction of sewage treatment 
and rubbish facilities; accelerate green belt and forest 
planting programs; increase support for energy conservation 
and pollution-control projects. 
 
-- Industry: support innovation, industrial restructuring, 
and the development of the high-tech and service industries. 
 
-- Disaster rebuilding: speed reconstruction in the areas 
hit by the May 12 earthquake. 
 
-- Incomes: raise next year's minimum grain purchase and 
farm subsidies; increase subsidies for low-income urban 
residents; increasing corporate pension funds and 
allowances. 
 
-- Taxes: extending VAT reform to all industries (estimated 
impact will be to reduce corporate tax burden by RMB 120 
billion, USD17.6 billion); encourage technological 
upgrading. 
 
-- Finance: remove loan quotas; appropriately expand bank 
credit for priority projects, rural spending, smaller 
enterprises, technical innovations and industrial 
rationalization. 
 
Measures Adopted to Date 
------------------------ 
 
¶16. (U) Annex B: 
 
-- Raised tax rebates by 2% for certain textile and garment 
exports. (August 1) 
 
-- Raised the credit quota by 5 percent for national 
commercial banks and 10 percent for local commercial banks. 
(August 5) 
 
-- Cut interest rates for one-year loans by 27bps to 7.2%. 
(September 16) 
 
-- Cut the reserve requirement ratio for all but the five 
largest banks by 1% to 16.5%. (September 25) 
 
-- Removed the stamp tax on stock purchases; allowed SOEs 
to repurchase stocks; and began purchasing bank stocks. 
(September 19) 
 
-- Launched a margin financing and securities lending plan. 
(October 5) 
 
BEIJING 00004178  004 OF 004 
 
 
 
-- Allowed non-financial enterprises to float mid-term 
bonds. (October 6) 
 
-- Cut deposit and lending rates 27bps. (October 8) 
 
-- Cut the reserve-requirement ratio 0.5%.  (October 15) 
 
-- Increased house-purchase tax exemptions, lowered 
mortgage interest rates, and lowered down payment 
requirements. (October 27) 
 
-- Cut benchmark interest rates by 27bps. (October 30) 
 
-- Raised tax rebates for labor-intensive export items such 
as textiles, toys, garments, and high-tech products. 
(November 1) 
 
RANDT