2008: Beijing will use monetary not fiscal stimulus to boost GDP.

Consensus said:

China's growth model at serious risk following global financial crisis. Fiscal policy will be used to boost growth. 

We said:

Monetary stimulus will take the lead. The storm clouds generated by the spreading global financial crisis have spurred China’s policymakers to put into motion major economic policy changes. Although some analysts anticipate a large new fiscal stimulus programme, we think priority will be given to the loosening of monetary policy via reductions in banks’ required reserves and increases in loan quotas. We expect fiscal initiatives to follow, focused on tax relief and speeding up the pace of spending on existing infrastructure investment programmes. Hopes that the developing crisis might lead to a rebalancing of the government’s growth strategy away from investment and towards consumption are unlikely to be fulfilled. As in the past, the government’s primary goal is to boost economic growth as quickly as possible. Attempts to prevent growth from slipping below 8 per cent will concentrate on loosening monetary restraints on investment, not on measures to increase social spending. 

Outcome:

China's economy suffered as global demand fell but did not collapse. Enormous monetary stimulus of approx. 25% of GDP employed. 

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