china is set to ramp up stimulus spending

May 28, 2012

HONG KONG (MarketWatch) — China is set to ramp up stimulus spending to help stabilize the economy, with a program of interest-rate cuts and infrastructure-related spending being planned, according to analysts, who caution the program won’t be big enough to bring about a rapid turnaround in the slowing mainland economy.

In a research note Monday, Credit Suisse said the new policy emerged from a meeting by the State Council, or China’s cabinet, last week when Premier Wen Jiabao urged “greater emphasis on growth.”

“We believe that government has started a new round of fiscal stimulus,” Credit Suisse analyst Dong Tao wrote in a note to investors.

Last week, the central government unveiled a 2 trillion yuan ($316 billion) credit line to the Ministry of Railways, 170 billion yuan in subsidies to environmental projects and about 78 billion yuan in support to social-housing projects, according to Credit Suisse.

Local governments were also encouraged to submit infrastructure project proposals for approval before the end of June, with the government promising to speed up funding support, according to Credit Suisse.

“All of these moves seem to suggest that the Chinese government has become more active in dealing with growth downturn,” Tao said.

Standard Chartered in a note Monday dubbed the unfolding stimulus package a ”mini me” version of the massive infrastructure-focused spending unleashed in 2008 to help the Chinese economy from the global financial crisis.

Standard Chartered’s Stephen Green said no figures were known as to the probable size of the new stimulus package being considered. He noted that it appeared similar to the previous stimulus package, even borrowing details such as subsidies for consumer goods along with an emphasis on infrastructure spending.

However, Green said the government appeared to be more cautious this time as it was eager to avoid what were seen as mistakes with its previous 4 trillion yuan spending package, some of which went to support projects that were later criticized as being poorly built, or in some instances became the focus of fraud investigations.

“The ‘new’ idea in this 2012 package is that is more private-sector participation,” said Green.

Credit Suisse’s Tao said the government was also likely to cut interest rates and push for more aggressive bank lending in June and July.

He added that the stimulus would help arrest the current deterioration in growth and investment “but they are probably not enough to stage a 2009-style rebound