Downward trend

Chin's government certainly has a large task at hand. What began as a credit-crunch in the US and Europe due to a collapse in the subprime mortgage industry has snowballed into a global economic crisis, and while the robust nature of China's banking system has left it relatively unaffected by the financial fallout, the drastic reduction in demand from the Western economies has had a severe impact on Chinese exports. The National Bureau of Statistics' preliminary estimates for 2008 show that China's GDP growth has slowed to 9% for the year, marking the first year of single-digit growth since 2003. Most worryingly, growth for Q4 2008 was a mere 6.8%, down significantly from the 10.6% seen in Q1.

Of course, for most countries a quarterly growth of 6.8% would be seen as a major achievement, especially considering the current economic climate. To provide some context, real GDP in the US contracted by 3.8% during Q4 2008; the UK saw GDP contract by 1.5% during the same period. However, high GDP growth is considered essential to provide jobs for China's large and expanding workforce, so annual growth below 8% is seen as problematic. The job market in China is already showing the strains of the current downturn: a recent survey of villages across the country suggested that around 20 million migrant workers are currently unemployed, around 15% of the total migrant labour pool. Moreover, 5 to 7 million new migrant workers enter the job market each year, and around the same number of students will graduate from university. Taking this into account, the number of people seeking work in China during 2009 could reach at least 30 million.

It's all in the details

According to a statement posted on the official government website, China's stimulus plan will concentrate on the following 10 areas: housing, rural infrastructure, transportation, health and education, the environment, industry, disaster relief, income, taxation, and finance. Full details of how the money will be spent remain vague. However, Zhang Ping, director of the National Development and Reform Commission ("NDRC"), revealed roughly how much will be spent in each area during a press conference in November 2008. The lion's share of the money, RMB1.8 trillion, will be spent on transportation infrastructure and the construction of new power grids. A further RMB1 trillion is earmarked for redevelopment of the areas affected by the earthquake in Sichuan last year. Elsewhere, RMB370 billion will be spent on improving rural livelihoods and infrastructure, RMB350 billion on environmental protection, RMB280 billion on social security and housing, and RMB160 billion on technological innovation.

So who will benefit most from this large-scale investment? As Caijing Magazine pointed out in their review of the plan, the focus on construction should benefit those in heavy industries such as steel and cement manufacturers and oil refiners. Caijing also predicts that, with plenty of cash available for lending in the Chinese banking system, the finance sector should benefit as well.

However, the stimulus plan does not just cover investment. Efforts are being made to stimulate domestic consumption as well, and such measures should benefit consumers and businesses alike. For example, tax cuts are planned to stimulate private investment. On the consumer side, China has launched a RMB850 billion plan aiming to provide healthcare to 90% of the population by 2011. This will provide a safety net which, it is hoped, will encourage the general population to save less and spend more.

Leading the recovery

Professor Frank Song of The University of Hong Kong School of Economics and Finance believes that the mainland government is taking a leading role in stimulating the economy.

While the scope and aspirations of China's stimulus efforts are certainly impressive, the plan has not been without its critics. First and foremost, it was revealed not long after the plan was announced that the central government will not be responsible for the entire four trillion sum; they will provide RMB1.18 trillion, with the rest coming from local governments. Some have criticised this move, arguing that local governments will find it difficult to raise the necessary funds. However, Economics Professor Frank Song of The University of Hong Kong disagrees.

"China is a big country - the central government basically plays a leadership role in stimulating the economy. Although only about 1/3 of the four trillion will be provided by the government, local governments have a lot of incentive to act. Before, China's government was trying to slow the economy by holding back local governments from investing in real estate projects etc., so this is a golden opportunity for them. That's why we've seen local governments enthusiastically supporting the stimulus package."

That said, he remains sceptical about one aspect of the plan: although it may well allow China to achieve its target growth of 8% in 2009, will it provide enough jobs to satisfy the growing demand for work? "I think that when the central government proposes 8% growth, it has the policy tools to do so, as we have seen with this 4 trillion stimulus package. I think it's very likely that we will have that 8% growth. But the problem is, does that translate into employment? Creating employment - the right kind of employment - is difficult. For example, in the PRD a lot of migrant workers are going back to their hometowns; a lot of jobs may be lost forever. These workers are not able to work in other industries, and they are not able to work in the agriculture sector. Even if you build highways and bridges, their skills are not appropriate for that kind of work."

Problems remain in the Chinese economy, despite the enormous stimulus package proposed. China's stimulus plan will create a lot of jobs in different industries, providing jobs for many of the unemployed and new workers on the job market. However, it is likely that, while factories remain closed, a small but significant proportion of China's migrant workers will remain out of work. Moreover, although increased investment is expected to boost GDP growth over the next two years, it remains to be seen whether domestic consumption can be increased enough to offset the reduction in exports. However, one thing is certain: with growth forecast to remain at 8% through 2010, China is in a better position than many to weather the financial storm.