The 4 Trillion Yuan Stimulus Plan
To counter the shock of the 2008 global financial crisis, the State Council adopted ten measures to expand domestic demand on 5 November 2008, estimating that about 4 trillion yuan of investment would be needed by the end of 2010, including 1.18 trillion (later 1.26 trillion) of new central government investment, mainly for infrastructure, post-earthquake reconstruction, affordable housing and rural livelihoods, alongside a moderately loose monetary policy. RMB loans rose by 9.59 trillion yuan in 2009, and local government debt reached 10.72 trillion yuan by the end of 2010. Officials called the decisions "entirely correct," while the plan's links to credit expansion, local debt and overcapacity have long been debated.
Background
In the second half of 2008 the US subprime crisis turned into a global financial crisis. China's exports fell sharply, and growing numbers of export-oriented factories on the coast halted production or closed, laying off workers. According to Li Yizhong, then minister of industry and information technology, monthly industrial value-added growth was still 16 percent in June 2008 but fell steadily thereafter, to just 2.8 percent in January–February 2009. He also noted that the Central Economic Work Conference at the end of 2007 had still been focused on preventing overheating; within a year the direction of macroeconomic policy was reversed.
The Ten Measures and the 4 Trillion Yuan
On 5 November 2008 Premier Wen Jiabao chaired a State Council executive meeting that called for "a proactive fiscal policy and a moderately loose monetary policy" and adopted ten measures to expand domestic demand and promote growth: speeding up affordable housing, rural infrastructure, major infrastructure such as railways, highways and airports, health, culture and education, and environmental projects; accelerating independent innovation, structural adjustment and post-earthquake reconstruction; raising urban and rural incomes; introducing VAT reform nationwide; and lifting quotas on commercial bank lending. The meeting estimated that these projects would require about 4 trillion yuan of investment by the end of 2010 and decided to add 100 billion yuan of central investment in the fourth quarter of that year. Xinhua announced the decision on 9 November.
Funding and Accompanying Policies
In March 2009 the National Development and Reform Commission (NDRC) set out how the 4 trillion yuan would be spent: about 1.5 trillion on major infrastructure such as railways, highways, airports and water projects and on urban grid upgrades; about 1 trillion on post-disaster reconstruction; about 400 billion on affordable housing; about 370 billion on rural livelihood projects and infrastructure; about 370 billion on innovation, structural adjustment and technical upgrading; about 210 billion on energy saving, emission reduction and ecological projects; and about 150 billion on health, education, culture and other social programs. New central government investment would account for 1.18 trillion yuan, with the rest to come from local governments, companies, bank loans and other investment. The American economist Barry Naughton noted that the center was directly funding only about 30 percent, and that the total included earthquake reconstruction money that had already been committed. Alongside the investment plan came adjustment and revitalization plans for ten industries, a halving of the purchase tax on small-engine cars and the early issue of 3G licenses.
Credit Expansion and Local Debt
Under the "moderately loose" monetary policy, bank credit expanded rapidly. According to the People's Bank of China, RMB loans increased by 9.59 trillion yuan in 2009, 4.69 trillion more than the year before, and outstanding loans at year-end were up 31.74 percent. To raise matching funds, local governments borrowed heavily through financing platform companies. Audit results published by the National Audit Office in June 2011 showed that local government debt stood at 10.72 trillion yuan at the end of 2010, and that debt outstanding had grown by 61.92 percent in 2009; the audit covered 6,576 financing platform companies, and debt raised by these platforms together with government departments and agencies accounted for nearly 70 percent of the total.
Assessments
On 5 March 2013, in his last government work report as premier, Wen Jiabao said that of the 4 trillion yuan of new investment over two years, 1.26 trillion had come from the central budget, and that "practice has proved these decisions entirely correct." Li Yizhong endorsed this conclusion in remarks at the same session, while acknowledging that the measures had contributed to excessive growth in fixed-asset investment, local government debt and industrial overcapacity. The relationship between the 4 trillion plan and the subsequent credit expansion, local debt and overcapacity has remained a long-running subject of debate among economists in China and abroad.
Narrative Comparison
| Source | Narrative |
|---|---|
| NDRC (2009) and Wen Jiabao's government work report (2013) | Officials presented the 4 trillion yuan investment as a response to the shock of the international financial crisis to keep the economy growing steadily and relatively fast, stressing that the money went to "key areas and weak links in national economic and social development" such as affordable housing, rural livelihoods, infrastructure, social programs, energy saving and environmental protection, and post-disaster reconstruction; blind investment and low-level duplicate construction were to be prevented, and 24 central inspection teams led by the Central Commission for Discipline Inspection and the Ministry of Supervision oversaw the new central investment projects. In 2013 Wen Jiabao concluded that the center's sound judgment and decisive action had prevented China's modernization from suffering a major setback because of the huge external shock, and that "practice has proved these decisions entirely correct." |
| Barry Naughton, China Leadership Monitor, No. 28 (2009) | Naughton argues that the Chinese government, shocked by the speed and depth of the 2008 downturn, responded vigorously with a very large stimulus package made up of an investment plan, funding mechanisms and industrial policies, the investment plan resembling the methods of the planned economy. The 4 trillion yuan equaled 12.5 percent of 2008 GDP, but the center committed to fund directly only 1.18 trillion, about 30 percent, and the overall program included earthquake reconstruction money that had already been committed. He notes that RMB loans rose by 4.6 trillion yuan in the first quarter of 2009 alone — more in three months than the entire stimulus over more than two years — and that these initiatives amounted to a large, activist intervention that would increase the state's direct role in the economy and shape China's development trajectory for a decade or more. |
| Li Yizhong (then minister of industry and information technology), remarks at a CPPCC group session, 2013 | Li Yizhong recalled accompanying Wen Jiabao to the Wuxi No. 1 Cotton Mill at the end of June 2008, where the mill's head said "this is the hardest year for the textile industry since reform and opening" — "we were all shaken when we heard it." In early December Wen phoned him: the United States and Germany were propping up their car industries, "what can we do to boost the economy? The stock market, the property market, the car market," and the NDRC and Finance Ministry should come up with a plan quickly; Finance Minister Xie Xuren told him, "Yizhong, stop coming up with ideas, my pockets are empty." On 25 December Zhang Dejiang suddenly told him 3G licenses would be issued "immediately." Li called the measures "a shot in the arm, without which the economy might have collapsed," while acknowledging that they had contributed to local debt and overcapacity, and that in hindsight the slogan "no layoffs and no pay cuts during the financial crisis" had "not been in line with market principles." |
Key Milestones
- State Council adopts ten measures and 4 trillion yuan investment
Wen Jiabao chairs a State Council executive meeting that calls for a proactive fiscal policy and a moderately loose monetary policy and estimates about 4 trillion yuan of investment needed by the end of 2010; Xinhua announces it on 9 November.
- PBOC reports 9.59 trillion yuan in new loans for 2009
RMB loans rose by 9.59 trillion yuan in 2009, 4.69 trillion more than the year before; outstanding loans at year-end were up 31.74 percent.
- National Audit Office publishes local debt audit
Local government debt stood at 10.72 trillion yuan at the end of 2010, having grown 61.92 percent in 2009.
- Wen Jiabao calls the decisions "entirely correct"
In his government work report Wen Jiabao says 1.26 trillion of the 4 trillion yuan of new investment came from the central budget and that practice has proved the decisions entirely correct.
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