Can a mini stimulus boost GDP growth?

Considering the correlation effect of the construction industry, it can result in about 876 billion yuan of gross output. So, the two mini-stimulus measures can play an important role in boosting other industries. This is the highlight of this round of targeted mini stimulus.

According to estimates, the two stimulus measures can boost GDP growth for the whole year by 0.3 to 0.4 percentage points. If completed on time, the measures could lift the GDP growth back to about 7.5 percent.

The outlook for the entire year, therefore, is optimistic, and China could realize the growth target of about 7.5 percent if other factors remain unchanged. The Chinese economy may experience sputtering growth now, but it will gather pace in the second half of the year.

Government won't resort to short-term stimulus

World Bank pares 2014 outlook

As evident from the tax breaks for small and micro enterprises, the State Council is considering raising the tax threshold for smaller companies significantly above the existing level of 60,000 yuan and the current tax breaks will be extended until 2016.

Since small and micro businesses are vital to employment and the market, this measure could effectively reduce their operating costs, increase their profits and enhance their vitality, laying a solid foundation for creating 10 million jobs this year.

But the effectiveness of the tax cuts in stimulating the economy will not be felt instantly, because the focus will be more on safeguarding existing jobs than creating new ones.

Nevertheless, this round of economic stimulus has its share of deficiencies. Railway construction as part of infrastructure construction will indeed improve the total factor productivity and supply ability of the economy, stimulate short-term economic growth and create long-term growth momentum.

But since redevelopment of shantytowns means just investment in housing - applicable only to the demand side of the economy - whose action cycle is short, it will not produce sustainable economic stimulus. Moreover, because of the rule of diminishing marginal efficiency of investment, it will become more difficult to use the fiscal policy to stimulate the economy in the future.

So to make the economy rebound in the second quarter, the central government should expedite the implementation of the three pro-growth initiatives, appropriately speed up the process of examination and approval, and ensure that funds are forthcoming. And since the current stimulus measures are insufficient, more mini-stimulus measures should be introduced to intensify fiscal stimulation to meet the 7.5 percent growth target.

The author is a researcher in macro-economics at the Institute of Financial Derivatives, affiliated to China Financial Futures Exchange.

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