Can a mini stimulus boost GDP growth?

China has set a GDP growth target of 7.5 percent for 2014, but because of the economy's weaker-than-expected performance in the first quarter of this year, many institutions have lowered their annual growth forecast for the country. It seems the 7.5 percent growth target is too ambitious to meet.

Addressing the Bo'ao Forum opening ceremony on April 10, Premier Li Keqiang ruled out the possibility of short-term massive stimulus policies even if the economy falters. Li's statement demonstrates China's determination to push through economic reforms even at the cost of a moderate slow-down. But it also indicates that the government may work a mini-stimulus package to achieve the growth target.

In fact, on April 2, Li presided over a State Council executive meeting, which announced three major pro-growth initiatives, including tax breaks for small and micro enterprises, greater support for the redevelopment of run-down urban areas and investment and financing reforms in railways. This shows that the fiscal policy has finally begun to play its role and the three major pro-growth initiatives will become the pillars of this round of targeted mini stimulus.

On April 3, the monetary policy committee of the People's Bank of China said China will continue its prudent monetary policy and maintain "moderate" liquidity to achieve reasonable growth in loans and social financing. In the absence of a loose monetary policy, the fiscal policy has become the only therapy for the economy.

But can the three major pro-growth initiatives turn the tide?

China plans to invest 630 billion yuan ($101.7 billion) in railways' fixed assets and build 6,600 kilometers of tracks this year, some 1,000 kilometers more than last year. However, the fixed asset investment in the railways this year will be 60 billion yuan less than that in 2013.

On renovation of run-down urban areas, Li had said earlier that the government aims to renovate or build more than 4.7 million homes in 2014 for people living in makeshift shelters, an increase of 1.66 million housing units over last year. The investment on this front is expected to exceed 1 trillion yuan. On the basis of equal costs of renovating run-down urban areas in 2014 and 2013, the redevelopment of the additional 1.66 million homes will invite an investment of about 353.2 billion yuan.

Both the railway and urban redevelopment plans are part of the construction industry. Combining the 60 billion yuan reduction in railway construction and the 353.2 billion yuan increase in urban redevelopment, the two pro-growth initiatives can bring in new investments of 293.2 billion yuan to the construction industry. 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.

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.