In the past few months, the market focus has been on the Federal Reserve’s exit strategy and a slowdown of China’s economic growth. Regarding the latter one, China’s economy is expected to grow at somewhere around 7% in the first quarter, a level significantly below the double-digit growth many years ago and the 7.7% growth last year.
Since the country has set a target of 7.5% economic expansion for 2014, the first-quarter performance triggered further concern about its growth momentum. In response to that, China’s State Council, the government’s executive body, unveiled Wednesday a stimulus package to boost growth, including additional spending on railways, upgraded housing for low-income households, and tax relief for small businesses.
Although the package is considered as a mini one compared to the four trillion yuan ($650 billion) program rolled out in late 2008 amid the global financial crisis, it would still impact the overall economy in many ways.
Stimulus 1: Additional Spending on Railways
The government would further develop infrastructure through accelerated railway construction, particularly in the nation’s central and western regions, and more aggressive financing. Some operations in the public interest would be subsidized and 150 billion yuan ($24.6 billion) in bonds would be offered by the government to finance construction for the railways. Relatively, the stock prices of companies in the railway sector rallied, as shares of China Railway Group surged 5.1% and China Railway Construction Corporation’s shares jumped 7.2%.
Personally, I think the stimulus will have a double-sided effect. Positively, tremendous infrastructure construction will boost growth effectively, and the emphasis on development in the central and western region will lead to more balanced economic landscape across the country. Negatively, as China is undergoing a significant transition from being overly dependent on investment and export to relying more on domestic consumption, the massive government-led investment project might impede structural reform, and the increasing credit along with financing might pose additional risk in the credit market.
Stimulus 2: Upgraded Housing for Low-Income Households
The government would also spend more on slum clearance and upgrade of poorer urban areas. It added that the China Development Bank, a lender for key government policy projects, would set up a special arm to issue bonds to support new homes.
I think this measure could be a complement to the railway construction because of its focus on ordinary people’s well-being. It is a tradition that Chinese people care a lot about their housing and treat it as the most important measure of their living standard. Despite that the implementation of housing upgrade is yet to see, this proactive approach could ease social instability and unleash the potential of domestic consumption in the mid- to long-run.
Stimulus 3: Tax Relief for Small Businesses
The government would extend existing tax breaks to small businesses until the end of 2016 and raise the threshold for taxing smaller businesses, which have been struggling as economic growth slows.
Personally, I do believe that small businesses will benefit from decreasing tax burden, but this measure cannot address their problem radically, which is due to the lack of financing. So the government should also accelerate the financial-sector reform by incorporating private capital and diversifying lending channels for small businesses.