China Market Intelligence: Mar-apr 2009, China Business Review

China Market Intelligence

China Tackles Economic Crisis with Fiscal Stimulus, Consumption Plans

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s the global economic crisis has deepened, the PRC government has become increasingly concerned about the impact of the crisis on China’s economy and has launched various efforts in response.

Central stimulus plan The centerpiece of China’s response is the massive ¥4 trillion ($585 billion) stimulus plan announced last November. Stimulus spending will focus on transportation construction, Sichuan earthquake reconstruction, rural infrastructure projects, environmental protection, housing projects, indigenous innovation (China’s strategy to develop domestic innovative and technological capabilities over the next decade), and healthcare and education. Each of these broad categories conforms to a set of policy goals already outlined in China’s 11th Five-Year Plan (2006–10). About ¥1.18 trillion ($263 billion) of the stimulus is slated to come directly from the central government, while the remaining funds will be provided by provincial and local governments, state-owned and private enterprises, and policy and commercial bank loans. The State Council allocated ¥120 billion ($17.5 billion) of central government funds for deployment in November and December 2008 and plans to spread the remaining stimulus spending over the next few years. Officials at the PRC National Development and Reform Commission (NDRC), the primary agency responsible for approving stimulus package spending, said in January that it would funnel ¥100 billion ($14.6 billion) of the stimulus funds into local government projects for implementation before March, when China’s National People’s Congress convenes. Though NDRC retains primacy in the initial approval of stimulus projects, local ministry and provincial officials will have the final say in project implementation and execution. In general, projects worth more than ¥30 million ($4.4 million) in funding will need NDRC approval, while those over ¥200 million ($29.2 million) require NDRC and State Council approval. Recent conversations with NDRC suggest that provincial projects that do not involve national funds will not require NDRC approval, provided that the projects are not in prohibited or sensitive industries as described in NDRC’s Approval and Filing catalogues. In early February, NDRC announced that it will spend ¥130 billion ($19.0 billion) more on several national projects that involve public facilities, low-income housing, infrastructure, health and education, economic restructuring, and the environment, though no timeframe 12 March–April 2009 chinabusinessreview.com

was given for the spending. NDRC officials have indicated to the US-China Business Council (USCBC) that this round of stimulus spending is separate from the ¥100 billion package announced in mid-January but still a part of the ¥4 trillion announced in November. NDRC will work with various ministries on the approval and funding of central-government-sponsored projects and retain its approval authority over non-national stimulus projects.

Other policies: exports and consumption Beyond the stimulus package, China has also taken significant steps to boost the export sector. Most important, cuts in export value-added tax (VAT) rebates made in summer 2007 have been reversed and restrictions on processing trade eased. The renminbi, which had been steadily appreciating since July 2005, has held fairly steady since July 2008. The People’s Bank of China has slashed interest rates, raised lending quotas for banks, and pushed for more loans to struggling small and medium-sized enterprises. In another move to prop up China’s economy, in late December the State Council issued the Opinion on Stimulating Circulation and Expanding Consumption. Drafted mainly by the PRC Ministry of Commerce and largely a vague restatement of basic principles laid out in previous announcements, the opinion includes 20 measures to invigorate consumption. Starting in February, the Home Electronics to the Countryside program, which provides cash subsidies of 13 percent for rural residents’ purchases of home appliances, was expanded to cover the entire nation. Motorcycles, water heaters, computers, and air conditioners have joined televisions, refrigerators, washing machines, and mobile phones on the list of products that may be subsidized by provincial governments. The opinion also notes the government will improve the rural logistics network and set up more rural goods distribution centers. For urban areas, the opinion contains vague provisions on improving community services to stimulate consumption and highlights potential changes to stimulate the auto sector, which has slowed significantly in recent months.

Industry-specific revitalization plans As promised in earlier State Council documents, PRC government agencies drafted revitalization plans for several key industries. The industries are iron and steel, autos, shipbuilding, petrochemicals, textiles, light industry, nonferrous metals, equipment manufacturing, logistics, and electronics and information technology (IT). Key measures

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and policies in the plans include relieving the tax burden on enterprises, supporting financial credit development, launching enterprise-technology-reform projects, encouraging mergers and acquisitions to improve risk forbearance and global competitiveness, fully developing rural markets, expanding exports, and storing energy. As CBR went to press, China had approved in principle plans for the industries listed above; a few details follow. The PRC government also issued plans to invest in rail construction and energy and environment projects. ■ Steel and autos The State Council’s plans for China’s steel and auto industries aim to eliminate obsolete capacity, accelerate innovation, and cut export tariffs. Some analysts note that the auto plan may favor light, efficient engines. ■ Shipbuilding The plan to stimulate the shipbuilding industry urges banks to boost finance for vessel exports, extends financial support for domestic buyers of oceangoing ships to 2012, encourages the replacement of outdated ships, suspends new shipyard construction, and supports technological renovation and industrial updates. ■ Textiles The State Council in early February announced increases in the export VAT rebate rate for textile and garment exports from 14 percent to 15 percent. Actual implementation dates remain unclear, but moves to boost textile exports and market share could meet opposition abroad. ■ Machinery manufacturing The State Council also approved a plan that grants heavy machinery manufacturers tax incentives, especially when they engage in research and development. ■ Electronics and IT According to PRC press reports, the electronics and IT industry plan, approved in midFebruary, states that China will invest roughly ¥600 billion ($87.7 billion) over three years to promote thirdgeneration communication services, digital TVs, and nextgeneration Internet. ■ Light industry The State Council’s light industry plan calls for increases in export tax rebates and lending and other financial support for small and medium-sized lightindustrial companies. It also aims to speed technology upgrades in certain sectors to improve energy conservation and environmental protection.

■ Petrochemical industry Press reports indicate that the government will likely invest ¥100 billion ($14.6 billion) in petroleum-related project upgrades in 2009 and 2010 and ¥400 billion ($58.5 billion) for construction of 20 new, large petrochemical projects; these amounts were unconfirmed as CBR went to press.

Foreign company opportunities NDRC and MOFCOM officials in late January assured USCBC that foreign companies are welcome to participate in projects associated with the stimulus but provided no specifics. Companies should be aware that the majority of project contracts and licenses will be awarded at the provincial and municipal level and that opportunities vary greatly by sector. US companies that specialize in engineering, design, construction, energy, and other infrastructure services could see the best opportunities, as much of the total stimulus package targets infrastructure. National officials’ growing concern about severe water shortages in and around Beijing has increased the likelihood that environmental projects in China’s north— particularly water treatment plants and irrigation projects—will be a particularly high priority in the first half of 2009. Though China plans to aid various ailing industries with increased funding for projects, the State Council has made it clear that the country could also use the economic crisis as an opportunity to encourage mergers and acquisitions among domestic enterprises to create more competitive “national champions.” Foreign companies involved in or competing with sensitive, nationally controlled sectors, such as auto manufacturing, shipbuilding, or textiles, should not be surprised to see more domestic preference in 2009. USCBC expects stimulus-related announcements to be released at a steady pace and with varying levels of detail. The March National People’s Congress will bring additional focus to China’s economic recovery plans. This article is adapted from reports that first appeared in China Market Intelligence, the US-China Business Council’s (USCBC) members-only newsletter. To find out more about USCBC member company benefits, see www.uschina.org/benefits.html.

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