In this assignment, we will discuss about the action or type of fiscal policy adopted by China government to prevent their economic affected by the Global Financial Crisis as most of the country economic in the world was harmed. An expansionary or proactive fiscal policy was adopted by China government to burst their economic by increasing domestic demand in country. An economic stimulus package worth around 4 trillion RMB was planned by China government which involved investment on various industries in country. The final target of this stimulus package is to create a stability economic growth by boost the domestic demand in China. Basically the ideal of stimulus package can be described as below table:
Table 1: 4 Focuses of China Stimulus Package on 2009.
4 Focuses
An increase in government spending which worth 4 trillion RMB. Government will directly take part of around 1.18 trillion RMB while the rest will be covered by local government.
Ten key industries were defined as the main focuses area to boost the economic growth.
Achieve country development by technological innovation and advance scientific knowledge.
Ensure social security was protected and increase the social development in rural area.
Source: China Fiscal Policy during Post-Crisis Era, JIA Kang & LIU WEI (2011).
The purpose of the China stimulus package is to prevent the economics of their country against the global financial crisis during year 2007-2008. The increase in government spending is always the most effective way to prevent economic slowdown and boost the economic activities in a country. The direct spending into the market from government will create more demand in the domestic market against the reduction in demand from foreign market due to the global financial crisis.
Below chart will show us about the Investment portfolio worth total 4trillion RMB to be launch during year 2009-2010. Basically it can be divided into 7 major components which is post-earthquake reconstruction (1 trillion RMB), Civilian project (400billion RMB), Rural civilian project (370billion RMB), infrastructure (1.5trillion RMB), Social Welfare (150billion RMB), Sustainable environment (210 billion RMB), lastly will be Technology advances and industry restructuring (370 billion RMB). From here we can see that, the government stimulus package is more focus on the spending in infrastructures and public facilities to boost their economy. It is good for us to see that China's government trying to spend more on public infrastructures and facilities in order to attract more investment from private sector, either from domestic market or foreign market. A greater spending on public infrastructure and facilities will provide a better business environment and it will create the opportunity to attract more investment from private sector. It can be seen as the capital injection by China government into the market will create a multiplier effect when attract investment fund from private sector or encourage more spending from consumer market.
Table 2: Investment portfolio of China's Stimulus Package
A big spending from government will be one of the ways for government to inject capital or money into their country economic. It's always seem as an effective tool to for the government to directly get involved in their country economic activities rather than just rely on the "Invisible Hand" theory to wait their economic have a self readjustment process and recover back to normal situation.
Here, we would like to have a further discussion about what are the actual action take by China Government and what are the actual purpose they wish to achieve under their expansionary fiscal policy by stimulus package for year 2009-2010.
Increase of Government spending on public sector
The total spending on public sector will cover certain areas like railways, road, airport, power grid, disaster reconstruction, social welfare, water and electricity, healthcare, education and etc. However, the major part of the government spending on public sector was the development of country's infrastructure; it covered around 40% out of the total value of the stimulus package. The increase in government spending on infrastructure project will create more public benefit, investment or business opportunities in private sector, and it also implies that the more investment from private sector will come together with the increase in spending by government.
Increase Consumption
In recent years, the low labor cost and materials cost in China providing them the opportunity to sell their product or export the product on cheaper price to other country. It's also the main reason why the GDP of China maintaining in over 8% for few years recently. However, the recent global financial crisis was harmed most of the countries in the world and it also affected the amount of product export to other countries seem the economic slowdown will reduce the demand of other countries to China products. One of the purposes of China stimulus package for year 2009-2010 is to replace the reduction in international demand by increasing their domestic demand. It can be perform in the way like increase the income of citizen (e.g. tax reduction or tax rebate), and provide a better quality of public service to attract consumption (e.g. convenience healthcare systems, improve quality of education, and etc.).
Protect Export
