Response To the Chinese Government Stimulus, M↑& V↑--> PY↑

Chinese Premier Wen Jiabao, unveiling the government's economic stimulating plan for this year, reaffirmed its commitment to a 4 trillion yuan investment program and announced a record budget deficit of about 950 billion Yuan, though confusion remains over the real scale and impact of the stimulus plan.

I think the 4 trillion Yuan is only a rough figure of the spending plan. Actually about 1.2 trillion yuan will be financed by the Chinese central government. The rest will be financed by the local governments. The impact on the economy as a whole should be more than 4 trillion. Assuming the spending multiplier be 2.5, through the multiplier effect, it exerts a significant impact on the GDP. I think it will contribute about extra 2 to 3 percent of economic growth this year. The rescue action should be bold and swift ("出手要快要狠") as asserted by our Premier Wen Jiabao otherwise the unbearable economic pain may persist.

Beside the 4 trillion yuan fiscal impulse, I urge the Chinese decision-makers do aggressively manipulate the fiscal and monetary tools in order to regulate the ailing economy back to its right track in the midst of this global economic tsunami. Further stimulating domestic consumption and preventing deflation expectation hold the key to sustain the current recovery of our Chinese economy. I'm glad to know that the reaction to the stimulus package was the sharp surging in bank lending. The government report shows that she will target up to 5 trillion yuan bank lending this year. I think it can further raise the monetary base (cash and bank reserves) which gives it the right way to boost the economy.

The increase in spending in real estate property and private consumption will also stimulate the economy, as hundred of other related trading sectors will be boosted as a whole. Social security for the vulnerable groups should be enhanced. The Gini Coefficient, the indicator showing the gap between the rich and poor, is about 0.45 that is higher than those figures in Western European countries. Government assistance should help to social stability during this economic downturn. Short and medium term sustainable growth should then be maintained as the confidence be restored by such government effort.

http://wongtc.blogspot.com/2009/03/blog-post_07.html