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China gives $28 billion to local governments as it vows to meet economic targets

By Juliana Liu, CNN

Hong Kong (CNN) — China has set aside 200 billion yuan ($28 billion) for investment projects by local governments this year, as it promised to meet its own ambitious economic growth targets.

The news was announced by the country’s top planning agency, the National Development and Reform Commission (NDRC), at a Tuesday press conference, which disappointed investors who were expecting a much larger package of stimulus measures.

“We are confident in achieving the annual economic and social development goals and tasks, and in maintaining sustained, stable and healthy economic and social development,” Zheng Shanjie, the commission’s chairman, told reporters in Beijing.

China announced a 5% target growth rate in March, but a series of economic data over the summer has been so weak that economists were worried the goal might be missed. The world’s second-largest economy is in poor shape and suffers from a property crisis, weak spending and high youth unemployment, among other woes.

To help local governments struggling with mountains of debt, Beijing will provide 100 billion yuan ($14 billion) from the central government’s budget and an extra 100 billion yuan for investment projects, Zheng said.

Economists have been expecting additional fiscal measures totaling about 2 trillion yuan ($285 billion) to be announced this month, after Chinese leader Xi Jinping finally gave the nod in late September to a much-needed growth plan following months of dismal economic data.

“The NDRC provided a clear message today that policymakers will continue with a pro-growth stance. Nevertheless, investors were disappointed at the lack of details on new fiscal measures,” Fred Neumann, chief Asia economist for HSBC, told CNN. “Fiscal easing is urgently needed to accelerate growth on a sustainable basis. This is likely to come later this month.”

The measures announced last month have focused largely on monetary policy, which typically refers to decisions made by central banks to influence the cost of borrowing and control inflation. Fiscal measures, on the other hand, can include the use of taxation or other measures to impact public spending more directly.

The lack of a “bazooka” announcement on Tuesday poured cold water on the stock mania in Hong Kong and mainland China. Blue-chip stocks listed in Shanghai and Shenzhen last traded 6% higher, after soaring more than 9% at the market open. Hong Kong’s benchmark Hang Seng Index, which has just had its best two-week period since at least 2005, lost more than 5%.

What’s next?

Many economists believe much more must be done to restore confidence among consumers to spend again.

Jia Kang, formerly the director of a think tank affiliated with the Ministry of Finance, told The Paper, a state-owned newspaper, last week that Beijing should issue as much as 10 trillion yuan ($1.4 trillion) in long-term government bonds to fund investment in infrastructure and public works. He said the amount was “not unreasonable” because Beijing had rolled out similar stimulus measures in the past.

“We agree with top policy advisors like … Jia Kang that an over 10-trillion level or 10% of GDP could be necessary to turn around the economy, considering China’s own history of stimulus,” economists at Citi wrote in a Friday research note.

On September 24, the People’s Bank of China, the central bank, announced a cut in one of its main interest rates and reduced the amount of cash that banks need to hold in reserve. Cuts to existing mortgage rates were unveiled and the minimum mortgage downpayment was lowered from 25% to 15% for second-time homebuyers to support the ailing property sector. There were also promises to support the stock market.

Officials kept up the optimism the next day by announcing rare cash handouts to disadvantaged citizens and pledging subsidies for recent graduates struggling to find a job.

And later that week, the ruling Communist Party’s 24-member Politburo – a top decision making body – continued the bullish messaging. In a break with tradition, Xi dedicated the group’s September meeting to economic affairs.

Top officials acknowledged that “new situations and problems” had arisen in the economy and demanded urgent action, vowing to boost fiscal spending, arrest the decline of the property market and improve employment for fresh graduates and migrant workers.

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CNN’s Marc Stewart contributed reporting.

Article Topic Follows: CNN - Business/Consumer

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