Asia Weekly

China’s Stimulus Comes Amid Strong Retail Sales

Week Ended: November 14, 2008

This week China’s State Council announced a massive US$586 billion fiscal stimulus package—equivalent to 16% of China’s 2007 GDP—aimed at countering the effects of the global slowdown on the country over the next two years.

Given that China’s economy is only about a quarter the size of the U.S. economy, the magnitude of the stimulus is fairly astonishing. For the fourth quarter of this year, China has budgeted for additional spending of US$14.6 billion, which is expected to lead to an aggregate US$58.6 billion in spending with other related investment. While the entire package includes previously planned projects, the stimulus announcement clearly demonstrates the government’s determination to revive the growth of the world’s third largest economy.

The new measures call for investment in health care, education, environmental protection projects and technological innovation. They also focus on these key areas—affordable housing construction; rural infrastructure development; post earthquake reconstruction; road and rail infrastructure improvements; increased subsidies to farmers and improved social welfare; business tax reform and the elimination of lending quotas on commercial banks.

The stimulus program highlights the government’s growing concern over the pace of its economic slowdown, which saw China’s GDP growth fall to 9% in the third quarter this year, its lowest level in 5 years. However, with its US$1.9 trillion foreign reserve, a mostly balanced fiscal budget, vast national savings and a continued decline in inflation (now at 4% year-over-year), China is in a good position to mitigate the negative impact of the global slowdown. While the stimulus measures are a step in the right direction, there are still many questions remaining. The major risk for China still lies in how quickly and effectively the government can pass macro policies and carry out those measures.

Meanwhile, China’s retail sales are booming—up 22% year-over-year in October. Although the Olympic Games have done little to boost growth, the event may have caused some consumers to delay making purchases they would have made in August. Partly for this reason, but more importantly because of overall economic conditions, we expect the pace of growth to moderate. Nevertheless, recent retail sales figures were strong. Backed by China’s stimulus package, we believe this should help support growth momentum into 2009.

Henry Zhang, CFA
Research Analyst
Matthews International Capital Management, LLC

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