Although there should be some degree of optimism with the arrival of the stimulus package, multinational companies doing business in China must closely monitor the actions and policies of the Chinese Government.

The Chinese Government outlined a massive spending plan in the amount of RMB4 trillion (US$586 billion) in November 2008 to help mitigate the impact of the recent global financial turmoil and put the tumbling Chinese economy back on the right track. The stimulus package was further emphasised during the annual Central Economic Work Conference held on 8 December 2008, setting the tone for increased economic development efforts with a pledge to maintain stable and healthy growth in 2009 through domestic demand expansion and economic restructuring.

The Financial Crisis’ Influence on China

The global financial and economic crisis that has dragged the world economy into a recession has had a significant negative impact on the Chinese economy. The latest figures show that the economic growth, exports and various industries in China’s export-driven economy are slowing. Exports totalled US$115 billion in November 2008, down 2.2 per cent year-on-year in the first monthly decline since June 2001, while the previous decline, only 0.6 per cent, resulted from reduced US demand during the tech bubble burst at that time.

The overall decline in the Chinese economy, while of great concern, is not currently as extensive compared to Japan’s double digit declines in exports. Nonetheless, many companies in China have already been negatively affected by the slowdown. Low-end commodity exporters such as garment enterprises are seeing an export decline as much as 60 per cent compared to last year; steel makers are keeping capacity idle; multinational companies are closing factories, causing millions of migrant workers to become jobless; six million new graduates are on their way to an uncertain future as indicators show only two million job vacancies available; and most workers have seen their salary cut or frozen for 2009. Additionally, more than 70 per cent of China’s A-share market value has been wiped out from its peak in late 2007.

Notably, thanks to the central government’s tight control over foreign exchange and financial innovation, direct exposure of China’s financial institutions to the current financial meltdown seems ambiguous. A recent report shows three Chinese banks top the world banking list in terms of their market value. The possible recovery of the US, EU and Japanese economies after their unprecedented monetary and fiscal policy actions could improve external demand for Chinese products and services by the second half of 2009. It is hoped that China will regain its growth under the massive spending plan in Q3 of 2009.

10 Major Steps of the Stimulus Package over the Next Two Years

As the economy spiralled downward, the Chinese Government promptly put forward a stimulus package, showing its determination in tackling the crisis over the long term. During the Central Economic Work Conference, the central authorities pointed out that China will enhance and improve macro-economic control efforts and carry out an active fiscal policy, as well as moderate easing monetary policy. In this regard, expenditures in public areas will be “substantially increased”, and major industries should be positively affected. The stimulus package includes 10 major steps over the next two years. It provides for RMB280 billion to be spent on housing projects for low-income urban residents; RMB370 billion on improvement of people’s livelihood and infrastructure in rural areas; RMB40 billion on medical care, culture and education causes; RMB350 billion on ecological investment; and RMB1 trillion on disaster relief and reconstruction. Over the next two years, these 10 steps will be taken:

  • Housing – Building more affordable, low-rent housing and speeding the clearing of slums. A pilot program to rebuild rural housing will be expanded. Nomads will be encouraged to settle.
  • Rural infrastructure – Speeding rural infrastructure construction. Roads and power grids in the countryside will be improved, and efforts will be stepped up to spread the use of methane and to ensure the safety of drinking water. This plan also involves expediting the north-south water diversion project. At-risk reservoirs will be reinforced, water conservation in large-scale irrigation areas will be strengthened, and poverty relief efforts will be increased.
  • Transportation – Accelerating the expansion of the transport network, including more dedicated passenger rail links and coal routes. Trunk railways will be extended, and more airports will be built in western areas. Urban power grids will be upgraded.
  • Health and Education – Expanding the health and medical service sectors by improving the grassroots medical system, accelerating the development of the cultural and education sectors, and constructing junior high schools in rural western and central areas. More special education and cultural facilities will be built.
  • Environment – Improving environmental protection by enhancing the construction of sewage and rubbish treatment facilities and preventing water pollution in key areas. Green belt and natural forest planting programs will be accelerated, and support for energy conservation and pollution-control projects will be increased.
  • Industry – Enhancing innovation and industrial restructuring. Supporting the development of the high-tech and service industries will be a priority.
  • Disaster Rebuilding – Speeding reconstruction after disasters. In particular, focus will be on rebuilding the areas hit by the 12 May 2008 earthquake.
  • Incomes – Raising average incomes in rural and urban areas. It will be a priority to raise next year’s minimum grain purchase and farm subsidies, increase subsidies for low-income urban residents, and increase pension funds for enterprise employees and allowances for those receiving special services
  • Taxes – Extending reforms in value-added tax rules to all industries, which could cut the corporate tax burden by RMB120 billion (about US$17.6 billion). Technological upgrading will be encouraged.
  • Finance – Enhancing financial support to maintain economic growth by removing loan quotas on commercial lenders. Additionally, bank credit will be appropriately increased for priority projects in rural areas, and for smaller enterprises as well as technical innovation and industrial rationalisation through mergers and acquisitions.

These 10 initiatives are expected to have positive effects on cement, iron and steel producers amidst a boom in infrastructure investment. Commercial lenders will benefit as loan ceilings are abolished, and medium-sized and small companies are likely to benefit from preferential policies.

Moreover, on 1 March 2009, the National Development and Reform Commission yielded to public pressure for administrative transparency by promising to disclose expenditures concerning the stimulus package. The information and relevant detail about the expenditures will be listed shortly on its website.

Opportunities for Foreign Companies

Most non-Chinese companies doing business in China have been negatively affected by the slowdown in the Chinese economy. Many large multinational companies in China are facing the severe liquidity problems that contribute to a decline in economic activity in China. For example, the construction of two of the most luxurious hotels located in Xin Tian Di, the centre of Shanghai, along with some of the most expensive properties in China, came to a halt in the beginning of 2009 as the investors struggle with cash. However, although the latest figures show China’s utilisation of foreign direct investment declined 32.67 per cent year-on-year in January 2009, there is no sign of a large-scale capital pull-out from China. China might be one of the few countries to be expected to have a growth rate up to 7.5 per cent, making the Chinese market a potential place for investment by foreign investors in struggling economies.

On the other hand, concern among foreign companies over how the stimulus package will affect them is rising. The 10-step plan does not identify specific preferential policies that may directly benefit foreign companies doing business in China. However, unlike the US stimulus package aimed largely at rescuing financial institutions, the RMB4 trillion Chinese stimulus package will be completely spent in infrastructure sectors, which will elevate demand for various materials and technologies. Wang Zhiwen, a senior analyst from China’s Ministry of Commerce, pointed out that the current 10-step plan is only the first phase, which puts more focus on domestic enterprises. According to Mr Wang, the government is also considering a second phase of a stimulus plan in which various incentives will be given to foreign companies.

At present, foreign companies have already started to benefit. The auto industry is a good example as specific measures have been carried out, such as tax cuts to boost small car sales and to reduce petrol prices. Carmakers focused on small cars have seen a sales recovery in China since January 2009, according to the latest reports. Moreover, actions have been taken by the Chinese Government to further its “scientific outlook on development”. On 25 February 2009, a Chinese business delegation, led by Commerce Minister Chen Deming, signed in Berlin a total of 37 procurement deals worth around EUR11 billion (US$14 billion) with German companies. The deals in Berlin focus on engineering equipment, electronics and auto vehicles. With abundant cash on hand, China is actively seeking to purchase advanced technologies and equipment from the West.


With the arrival of the RMB4 trillion Chinese stimulus package, there should be some degree of optimism for multinational companies doing business in China. However, foreign companies doing business in China must be circumspect about their next move and closely monitor the actions and policies of the Chinese Government. Certainly at present, more favours are being given to domestic enterprises by the central government. No one can foretell how long this crisis will continue and what specific measures the Government will take to help foreign companies in China. At the very least, more strategic cooperation between foreign and domestic enterprises may be seen in the near future.