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Bailout shows consensus on mitigating economic risks

By Xin Zhiming (China Daily)
Updated: 2008-11-28 11:13

The National Development and Reform Commission unveiled some details of the government's 4-trillion yuan stimulus package at a press conference yesterday.

This not only reaffirms the government's commitment to reviving the economy, but also more importantly, clarifies where and how the funds earmarked in the stimulus package will be spent.

The NDRC move, set against the backdrop of yesterday's unexpectedly steep interest rate cut by the central bank, shows the central government has reached a widely-expected consensus on how to bail out an economy that risks slowing to as low as 7 percent growth in the fourth quarter. Just a year ago, it was soaring at nearly 12 percent, high enough to stir fear about overheating.

China's nearly $600 billion economic stimulus package, announced on Nov 9, gave the market a shot in the arm. But little deliberation or detail accompanied the announcement. In the following days, local governments made much bolder investment plans amounting to $2.6 trillion.

The ambitious investment pledges aroused a knee-jerk reaction in the capital market, but people were not sure how determined central policymakers are to carry them out and whether central and local policymakers could feasibly implement the plans. The recent lackluster performance of the domestic A-share market reflects this lack of confidence.

The investment plan details focused mainly on infrastructure, using government spending to get private investors involved so that fixed-asset investment will not drop drastically as exports fall next year.

But that is little help to the corporate sector and ordinary consumers. Factory closures lead to unemployment, which further reduces consumption.

The interest rate cut is a move in the right direction, particularly helping the real estate sector and slashing borrowing costs for enterprises across the board. It will lower interest costs for individual home-buyers who borrow from the banks by as much as $50 billion, based on mortgage lending figures from this March.

The next step should be cutting taxes for both businesses and individuals. It would be the most effective way to stimulate domestic demand. Only improving the well-being of enterprises and individuals will restore confidence in the overall economy.

The NDRC vowed to further improve income for retirees and the poor. It also said authorities will take measures to boost consumption and reduce enterprises' tax burdens.

The unveiled plan details and interest rate cut sends a clear signal that policymakers are not only determined to do the right thing, but know how to do it.