Watershed - What are the international factors on this package?

Venite Zhaoyang Xu - World leaders are expected to call on China to do its part to help strengthen the global economy in the face of what some economists say is the worst financial crisis since the Great Depression. Beijing has already indicated that it intends to help stabilize the global economy by keeping the Chinese economy, the fastest-growing economy in the world, on track. The head of the Chinese central bank, Zhou Xiaochuan, said at a meeting of finance ministers in Brazil that China could help stabilize international markets by encouraging consumption at home.

WS - What are the domestic factors on this package?

VZX - Beijing is trying hard to cope with a slowing economy. After five years of growth in excess of 10 percent, the Chinese economy is weakening because of slowing export and investment growth, declining consumption and severely depressed stock and property markets. Factory closures in southern China, often dubbed the factory floor of the world, have led to mass layoffs and even sporadic protests by workers who complained that owners disappeared without paying them their wages.

WS - Does the growth rate of China economy fall down quickly?

VZX - Yes. Growth in the fourth quarter of this year could be as low as 5.8 percent here, saying that the growth of China economy could fall to as low as 6% in 2009. I am worried that the Chinese economic miracle could be walloped by the global financial crisis.

WS - So, there is a huge pressure…

VZX - Yes, absolutely correct! Beijing was under huge pressure to take action. Interest rates have already been cut three times, bank lending quotas scrapped and specific measures introduced to help home buyers and exporters. The government is moving aggressively. So, China announced a massive economic stimulus package.

WS - What is the content of this package?

VZX - I think the package is aimed at bolstering a weakening economy and fighting the effects of a global economic slowdown. According to the amount allocated, 4 trillion Yuan, or some $586 billion US dollars, will be used on upgrading infrastructure, particularly roads, railways, airports and the power grid. It will also be used to raise rural incomes through land reform and used on social welfare projects such as affordable housing and environmental protection. The package also includes some other aspects, such as construction projects of gas pipes, nuclear power plants, dams and also disaster reconstruction spending from last winter's natural disasters. The new economic policies include a comprehensive reform in value-added taxes as well, which would cut industry costs by 120 billion Yuan (US$17.5 billion).

WS - How about the package compared with those of other countries?

VZX - Indeed, at $586 billion, the stimulus package is enormous for any country, let alone one whose gross domestic product was only about $3.3 trillion in 2007. Earlier this year, the United States Congress passed a $700 billion bailout package in a country with an economy whose size is close to $14 trillion. Analysts were expecting China to announce a big stimulus package but were surprised at the size of it. That is much more aggressive than I expected.

WS - Do you think the stimulus package is a right step at the right time?

VZX - Yes, although the package was out of expect. China's recently economic stimulus package is "a right step at the right time". China showing the desire to coordinate in terms of stimulating the world economy at this very critical moment is something that should be noted. The package will be considered a right step at the right time, and hopefully, with the right outcome.

WS - Will the package work?

VZX - Yes. The massive stimulus package will help stabilize economic growth, and push forward the shift of export-oriented markets in the wake of global financial crisis. Chinese economy will obviously benefit from the wide range of proposed infrastructure construction. In terms of the magnitude obviously it is quite large. The package is the largest economic stimulus effort ever undertaken by the Chinese government and would amount to about 7 percent of the country's gross domestic product during each of the next two years, but it's going to spread over a number of years, until 2010. The size of the stimulus package as a whole is large enough to help restore confidence. For example, the storage volume of steel in China is increasing, the situation is the same for cement, which, I think, will trigger the related industries and boost the employment markets as well. This will also improve people's income and their social welfare. This investment has huge implications, which will also boost credit capital markets, including the money raised by the local governments at various levels. The eventual impact will be multilayered.

WS - Does China have other policy to stimulate the economy?

VZX - Yes, for example, Beijing also said it was loosening credit criteria and encouraging lending, and that it needed to have a more "pro-active fiscal policy" in order to strengthen the economy. China also indicated a shift to a "moderately easy" monetary policy, after three interest rate cuts since mid-September. China will increase loans to key industries in expanding domestic demand. Besides the 586 billion US dollars investment, the government encourages commercial banks to enlarge their participation in this process. Meanwhile, more supportive policies will be extended to mid and small-sized enterprises, initiatives in energy-saving and emission controls.


Interview by Cai Yuelei