With the expansion of the global economic crisis, international trade has slowed dramatically. China has seen a diminished global demand for its products and is relying on boosting domestic demand to sustain economic growth. On November 5, 2008, the State Council announced a two-year economic stimulus plan involving a total investment of RMB4 trillion. The stimulus plan, which the State Council announced at a general meeting, is called the Ten Measures to Further Expand Domestic Demand and Promote Steady Economic Development.

The Ten Measures aim to facilitate projects that affect people’s livelihoods, as well as projects that involve infrastructure construction, environmental protection and post-catastrophe reconstruction, in order to stimulate economic development. In accordance with the principles laid out in the Ten Measures, the State Council has issued a series of opinions in recent months to fuel growth in several key sectors.  

I. Social Security Housing

In the first measure, the government affirms its commitment to subsidizing low-rent housing, renovating poor and imperiled housing in rural areas, and providing housing for nomads. Out of the RMB4 trillion investment, the government expects RMB280 billion to go towards affordable housing projects, which in turn stimulate demand for industries like construction materials, design, and electronic appliances.  

On December 20, 2008, the General Office of the State Council issued Several Opinions on Promoting Sound Development of the Real Estate Market. These Opinions are the subject of a separate article in this issue of China Update.  

II. Rural Infrastructure

According to the Ten Measures, the Chinese government will invest heavily in infrastructure construction in rural areas. It will:  

  1. Expand projects relating to the safety of methane supply and drinking water, rural highways, and rural power networks;
  1. Facilitate the construction of key water conservancy projects, such as the South-to-North Water Transfer Project; and  
  1. Reinforce imperiled dams.  

It will also rebuild water-saving systems for large irrigation fields, and provide more support for welfare programs. The government estimates that these projects will require an investment of RMB370 billion.  

On December 31, 2008, the State Council outlined its plans to further the reformation of China’s agricultural sector in 2009 in Several Opinions on Promoting the Steady Development of Agriculture and the Continuous Increase in Farmers’ Income. The Opinions on Agriculture cover, among other things, the development of infrastructure and the use of agricultural subsidies, management systems and financial service networks in rural areas.  

III. Transportation and Other Important Infrastructures

Under the Ten Measures, the Chinese government promotes the construction of railways, highways, and airports, particularly main railways in Western China, a network of special passenger railway lines, and coal transportation railways. The government will also arrange for the construction of airports in central and western China, and the renovation of urban power networks.  

Among the various projects proposed under the RMB4 trillion plan, transportation infrastructure is the most expensive, estimated to consume RMB1.8 trillion. The construction process will drive up demand for labor and materials in many related industries, such as the steel, cement, construction materials, and mechanical industries.  

IV. Healthcare System, Culture and Education

The Ten Measures call for expediting the construction of primary healthcare systems, facilitating the renovation of middle school buildings in rural western China, and promoting the development of special schools and cultural centers in villages and townships throughout central and western China. All together, these projects are estimated to require a total investment of RMB40 billion by the end of 2010. The China government is also reformulating policies relating to medical and educational reforms.  

V. Environmental Protection

The measures relating to environmental projects call for, among other things:  

  1. The accelerated construction of urban sewage and trash disposal facilities;
  1. Increased protection against water pollution in key locations;
  1. Assistance for the construction of key shelterbelts and the preservation of natural forests; and  
  1. Support for the development of key energy saving and pollution reduction projects.  

All in all, the environmental projects are estimated to use RMB350 billion of the RMB4 trillion plan.  

VI. Technology Innovation and Industrial Restructuring

According to the Ten Measures, the Chinese government will support the introduction of high technologies into manufacturing and other industries, the development of industrial technologies, and the improvement of the service industry.  

The Chinese government has long aimed to transform China’s economy from labor-intensive to technology-intensive. The economic crisis has presented an unexpected opportunity for the Chinese government to further this transformation, by crafting an economic stimulus plan that emphasizes high-technology. Moreover, the Chinese government recently reformed the valueadded tax system and implemented preferential tax treatments and other government incentives to encourage the development of high-technology companies.  

In addition, the Ten Measures expressly encourage the growth of the service industry. Like with high technologies, strengthening the service industry has long been an aim of the Chinese government. In fact, the Chinese government included the development of this industry as one of its primary tasks in the Eleventh Five-Year Plan for Economic and Social Development covering the period from 2006 to 2010.  

VII. Reconstruction after the Earthquake

The State Council and other government agencies have, since June 2008, issued rules and regulations regarding the reconstruction of the May 12 earthquake zone. These rules and regulations focus primarily on issues relating to finance, tax, industrial support, land resources, employment, social security, and food supply. Notably, a “Reconstruction-Post-Earthquake Fund” was established, and received RMB70 billion from the treasury in 2008.  

VIII. Increase in Urban and Rural Income

The government plans to raise the minimum purchase price of grain in 2009, and increase subsidy standards for farmers. According to the Opinions on Agriculture, the government will increase the amount of direct subsidies, well-bred subsidies, subsidies for purchasing farming tools, and integrated subsidies for farming expenses. The total amount of subsidies for purchasing farming tools, for instance, will be increased from RMB4 billion to RMB10 billion. The Ten Measures also specify plans to provide more social security benefits to both urban and rural residents, particularly lower-income residents.

IX. Value-Added Tax Reform

The Ten Measures state that the value-added tax (VAT) reform, which encourages enterprises to upgrade technologies by reducing their tax burden, will be implemented in all industries across the nation. The Chinese government has carried out more than four years of trial implementations of the VAT reform in parts of China.

Three major tax regulations were revised and passed during the same general meeting in which the Ten Measures were passed. These regulations, which took effect on January 1, 2009, are the interim regulations on VAT, business tax and consumption tax, respectively. The main revisions to these regulations include the following: to allow a full deduction of the input VAT for purchased fixed assets, which will substantially lighten the tax burden and improve the cash flow of VAT taxpayers; and to lower the VAT rate for small-scale VAT taxpayers to a uniform three percent.

X. Financial Support for Economic Development

The Ten Measures encourage the financial sector to provide more support for economic development. Specifically, the measures (1) remove the limitation on commercial banks’ credit scale; (2) increase credit support for important projects, small- and medium-sized enterprises, technology upgrades, and mergers and restructuring. Following the Ten Measures, the General Office of the State Council issued Several Opinions on Providing Financial Support for Economic Development, the Several Opinions) on December 8, 2008. This issue of China Update includes a separate article on these Opinions.  

Also consistent with the Ten Measures, the Ministry of Commerce released Seven Guiding Opinions on Expanding Consumption on November 25, 2008, which focus on improving the circulation of trade and accelerating the development of the logistics industry. The Seven Opinions call for improvements in the general credit system, and encourage retail enterprises to utilize down payments and account sales, and to allow credit sales for cars and durable goods. Special attention is also given to product safety, energy-saving devices, renewable resources and trade in second-hand goods.  

To address the public’s concern about government accountability with respect to the RMB4 trillion investment, the National Development and Reform Commission (NDRC) will publish information on how the RMB4 trillion is being spent on its official website. Relevant parties may request unpublished information from NDRC.  

In the face of the international financial crisis, it is necessary to boost confidence in order to prevent a meltdown of the financial system and a deepening of the global recession. To restore market confidence and boost economic growth, the Chinese government issued Ten Measures that focus on stimulating domestic demand, particularly consumer demand. Since it issued the Ten Measures, the Chinese government has taken several steps to implement them.