On Sunday I suggested that the newly-announced RMB 4 trillion fiscal package would cause markets to surge, but that the rally would not last very long as analysts began examining the numbers more closely. In fact the duration of the rally was even shorter than I expected. On Monday the markets did indeed surge, with the SSE Composite rising 7.3%, but by Tuesday markets had again turned bearish. After running up 0.7% in the first two hours of trading, the market once again lost its legs and the SSE Composite ended at 1844, down 1.7% for the day.
According to an article in Bloomberg the decline was led by financials and consumer companies “on concern a government stimulus package will fail to arrest an economic slowdown.” In fact all day analysts around the world have been weighing in on the fiscal package, with some arguing that this was a major event that would provide a serious boost to Chinese and global growth and others arguing that anywhere from RMB 1 trillion to RMB 2.5 trillion was old spending or overly optimistic projections and that the timing of the disbursements would not have a big enough impact on the immediate contraction in demand faced by Chinese businesses.
Standard Chartered’s Stephen Green, one of the bank analysts for whom I have a lot of respect, says that his reading of the package (and he warns that there are still big holes in his reading since details are so sketchy) suggests that government spending will contribute about 3.5 percentage points of real GDP growth to the Chinese economy in 2009. Since it contributed about 2.5 percentage points in 2008, this means that the total additional impact of the new package will be to boost growth next year by about 1 percentage point – not far from his original expectations.
Deutsche Bank’s Jun Ma was slightly more optimistic than Green about the additional impact of the fiscal plan (he thinks it will contribute an additional 2 percentage points to 2009 GDP growth). His optimism however was more than compensated for by his concerns that the economy is slowing faster than expected, and he actually cut his 2009 GDP growth forecast today from 8.0% to 7.6%.
Meanwhile the government seems clearly to recognize that timing is a problem. According to an article in today’s China Daily:
Premier Wen Jiabao Monday urged local governments not to “waste a single minute” in implementing the 4-trillion-yuan ($586 billion) stimulus plan unveiled on Sunday. “In expanding investment, we must be fast, effective and forceful. We must focus on priorities and adopt a down-to-earth attitude to implement the measures,” he told an executive meeting, which was presided by him and attended by provincial leaders and Cabinet ministers.
For those who are more optimistic about the effects of the stimulus package, one of the key arguments is that previous fiscal stimulus packages have worked in China.
