That 4 Pesky Trillion Number

One thing I didn't get into in the story mentioned in the previous post was the meaning of the 4 trillion renminbi the goverment says it will be spending. There seems be some confusion about whether this is all new money or an aggrgation of previous promised spending such as the earthquake relief funds. Merrill Lynch has an excellent, succinct breakdown, which I reproduce below. They also forecast the package will add three percentage points to China's GDP, which is pretty hefty.

 

Bottom line: this RMB4.0tn is an all-in-one number

The RMB4.0tn is a combination of all the individual investment plans announced since mid-October, in our view, and is not incremental to them. It especially includes money for post-earthquake reconstruction (could be RMB700bn before end-2010) and an upwardly revised plan for railway construction (RMB1.37tn before end-2010).

Then what's truly new? RMB1.7tn or RMB3.1tn

If we use the 11th Five-year plan as the benchmark, about RMB3.1tn of the RMB4.0tn is new. If we use the 9 November 2008 (the day of the official RMB4.0tn release) as the benchmark, about RMB1.65tn is new (it's new only because we don't now the exact numbers. We knew those investment plans since mid-October after the State Council meeting).

The RMB4.0tn has much new and relevant information

This is the first time Beijing has announced the exact size of the stimulus plan, after weeks of meetings. Despite the fact that part of the RMB4.0tn has already been announced, this stimulus plan provides the all-in-one number, determines the size of other individual plans, and perhaps most importantly, shows that the government is quite determined to maintain relatively high growth.

Where does the money come from?

Based on historical and customary arrangements, the central government most likely will pay one fourth of the RMB4.0tn, or RMB1.0tn by issuing fiscal bonds, and the rest will be shared by local governments and the corporate sector. However, the central government may have to shoulder a bigger share this time as local government may have problems getting funds. We think the central government's fiscal position is strong, and financing should not be an issue.

Impact on GDP growth: 3.0% for 2009-10

We estimate that the fiscal stimulus plan could raise GDP growth in 2009 and 2010 by about 3.0% per year. We find that imports for non-export related domestic consumption and investment is 5% of GDP. So, we estimate that about US$29bn will leak to other economies directly, and a couple of billion indirectly, through rising incomes of Chinese households.