Demystifying China’s Fiscal Stimulus

China's government economic stimulus package in 2008-09 appears to have worked well. It seems to have been about the right size, included a number of appropriate components, and was well timed. Its subnational component was designed to maximize the impact of the stimulus package on the economy and minimize the potential procyclical elements that are usually built into subnational fiscal mechanisms in federal countries. Moreover, China's massive fiscal stimulus played an important role in the overall recovery of the global economy. Using a simple analytical framework, this paper focuses on two key factors behind the success of the stimulus: investments in bottleneck-easing infrastructure projects and countercyclical nature of subnational spending based on the assumption that well-chosen infrastructure projects could improve business climate and thereby crowd in the private investment. The paper concludes that the expansionary subnational government spending played a key role in strengthening the overall impact of the stimulus and sustaining growth. It also highlights the importance of public investment quality and cautions about the sustainability of local government financing through the domestic banking system and increases in local governments off balance sheet or contingent liabilities. These lessons may be of particular relevance today for China, as well as other countries, in formulating policy response to another global economic slowdown or crisis, possibly as a result of the Eurozone turmoil. For China, investing in urban infrastructure and green economy, as well as in higher quality and better targeted social services, will be crucial for improving income inequality and inducing a more inclusive growth path.

Bibliographic Details

Main Authors:	Fardoust, Shahrokh, Lin, Justin Yifu, Luo, Xubei
Language:	English en_US
Published:	World Bank, Washington, DC 2012-10
Subjects:	AGGREGATE EXPENDITURE, AUCTION, BACKED BONDS, BALANCE SHEET, BANK BORROWING, BANK LENDING, BANK LOANS, BANK POLICY, BANKING SECTOR, BANKING SYSTEM, BINDING CONSTRAINT, BONDS, BUDGET SURPLUS, BUDGETARY EXPENDITURES, BUSINESS CYCLE, CAPITAL FLOWS, CENTRAL AUTHORITIES, CENTRAL GOVERNMENT, CENTRAL GOVERNMENT GUARANTEE, CENTRAL GOVERNMENT REVENUES, CENTRAL GOVERNMENT SPENDING, CITIES, COMMERCIAL BANKS, COMMERCIAL LOANS, COMPARATIVE ADVANTAGES, CONSUMPTION EXPENDITURE, CONSUMPTION SMOOTHING, CONTINGENT LIABILITIES, CORPORATE DEBT, CORPORATE INVESTMENT, CORPORATE SAVING, CREDIT MARKETS, CREDITORS, CURRENCY, CURRENT ACCOUNT SURPLUS, DEBT CRISIS, DEBT LEVEL, DEBT RATIO, DEBT SERVICE, DEBTS, DEFICITS, DEVELOPING COUNTRIES, DEVELOPING COUNTRY, DEVELOPMENT BANK, DOMESTIC BANK, DOMESTIC BANKING, EMERGING ECONOMIES, EMERGING MARKETS, EMPLOYMENT, EQUIPMENT, EXPANSIONARY FISCAL POLICY, EXPENDITURE, EXPORTERS, EXTERNAL DEBT, FEDERAL COUNTRIES, FEDERAL COUNTRY, FEDERAL RESERVE, FEDERAL RESERVE BANK, FEDERAL TRANSFERS, FINANCES, FINANCIAL CRISIS, FINANCIAL MARKETS, FINANCIAL RESOURCES, FISCAL BALANCE, FISCAL CAPACITY, FISCAL DECENTRALIZATION, FISCAL DEFICIT, FISCAL FEDERALISM, FISCAL INSTITUTIONS, FISCAL MANAGEMENT, FISCAL PERFORMANCE, FISCAL POLICIES, FISCAL POLICY, FISCAL SPACE, FISCAL SUSTAINABILITY, FISCAL TRANSFERS, FIXED ASSETS, FIXED INVESTMENT, FOREIGN DIRECT INVESTMENT, FOREIGN EXCHANGE, FOREIGN EXCHANGE RESERVES, FOREIGN MARKETS, GLOBAL ECONOMY, GOVERNMENT BORROWING, GOVERNMENT BUDGET, GOVERNMENT DEBT, GOVERNMENT EXPENDITURE, GOVERNMENT EXPENDITURES, GOVERNMENT FINANCE, GOVERNMENT FINANCES, GOVERNMENT FINANCING, GOVERNMENT INTERVENTION, GOVERNMENT INVESTMENT, GOVERNMENT REVENUE, GOVERNMENT REVENUES, GOVERNMENT SPENDING, HOLDING, HOUSEHOLD INCOME, HOUSEHOLD SAVING, HOUSING, HUMAN CAPITAL, INCOME INEQUALITY, INDEBTEDNESS, INFLATION, INFLATIONARY PRESSURES, INFORMATION SYSTEM, INFRASTRUCTURE INVESTMENT, INFRASTRUCTURE INVESTMENTS, INSURANCE, INTEREST RATE, INTEREST RATE SPREADS, INTEREST RATES, INTERGOVERNMENTAL FISCAL RELATIONS, INTERGOVERNMENTAL TRANSFER, INTERGOVERNMENTAL TRANSFERS, INTERNATIONAL BANK, INTERNATIONAL CREDIT, INTERNATIONAL MARKET, INTERNATIONAL TRADE, INVESTING, INVESTMENT CLIMATE, INVESTMENT CORPORATION, INVESTMENT PROJECTS, INVESTMENT PURPOSES, ISSUANCE, LABOR MARKET, LAND AS COLLATERAL, LAND VALUES, LEVEL OF DEBT, LEVEL OF GOVERNMENT, LIQUIDITY, LIQUIDITY CONSTRAINTS, LOAN, LOAN CATEGORIES, LOCAL DEBT, LOCAL GOVERNMENT, LOCAL GOVERNMENT BORROWING, LOCAL GOVERNMENT EXPENDITURE, LOCAL GOVERNMENT FINANCE, LOCAL GOVERNMENTS, MACROECONOMIC EFFECTS, MARKET ECONOMY, MIGRANT LABOR, MONETARY FUND, MONETARY POLICIES, MONETARY POLICY, MORAL HAZARD, NATIONAL INVESTMENT, NEGATIVE SHOCKS, OFF BALANCE SHEET, OIL PRICES, OWNERSHIP STRUCTURE, PENSION, PENSION FUNDS, POLICY MAKERS, POLICY REFORMS, POLICY RESPONSE, POLITICAL ECONOMY, POLITICAL STABILITY, PRIVATE CAPITAL, PRIVATE INVESTMENT, PROFIT OPPORTUNITIES, PROVINCES, PROVINCIAL EXPENDITURE, PROVINCIAL GOVERNMENTS, PROVINCIAL INVESTMENT, PROVINCIAL REVENUE, PUBLIC DEBT, PUBLIC FINANCE, PUBLIC FINANCES, PUBLIC INVESTMENT, PUBLIC SECTOR SPENDING, RATE OF RETURN, REAL EXCHANGE RATE, REDISTRIBUTION, RESERVE, RESOURCE ALLOCATION, RETURN, RETURNS, REVENUE SHARING, REVENUE SOURCES, SAFETY NET, SOCIAL SERVICES, SOVEREIGN DEBT, SUBNATIONAL, SUBNATIONAL EXPENDITURES, SUBNATIONAL FINANCE, SUBNATIONAL GOVERNMENT, SUBNATIONAL GOVERNMENT EXPENDITURE, SUBNATIONAL GOVERNMENT EXPENDITURES, SUBNATIONAL GOVERNMENTS, TAX, TAX ADMINISTRATION, TAX BASE, TAX BASES, TAX INCENTIVES, TAX REFORM, TAX REFORMS, TAX REVENUE, TAX REVENUES, TAX SHARING, TAX SHARING SYSTEM, TAXATION, TOTAL GOVERNMENT EXPENDITURE, TOTAL GOVERNMENT EXPENDITURES, TOWN, TRADE SECTOR, TRANSPORT, TREASURY, TREASURY BONDS, WAGES,
Online Access:	http://documents.worldbank.org/curated/en/2012/10/16816609/demystifying-chinas-fiscal-stimulus https://hdl.handle.net/10986/12066
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