It could well be the most unobjectionable thing since Mozart began composing and the hills around San Pellegrino started spouting fizzy water. But China’s stimulus package, while welcomed by virtually all, is not easy to grasp – in part because of its scale, and because of the sheer number of announcements that have been made on the subject.
Since its unveiling last November, a flurry of measures have been added Lego-like on top. These deal with various spending initiatives, subsidies, rebates, interest rate cuts and social insurance programmes – not to mention specific provincial announcements such as a plan by Guangdong to help unemployed migrant workers. The government wants to be seen to be stimulating. But it also has two audiences. It wants to please both its own citizens and those foreign governments that still like to grumble about trade deficits and an undervalued yuan – and which want to see China orientate itself away from export-led growth model to greater domestic consumption.
At the heart of the proposals is Rmb4 trillion ($586 billion) of infrastructure spending. Government funds are being shared across different areas; the largest proportion is earmarked for reconstruction in earthquake-affected Sichuan but other programmes, some of which were discussed in WiC1, are targeted at railways, rural infrastructure and public housing.
Foreign analysts are struggling to condense all of this activity into a quantifiable whole. Each week, as new measures are announced, it is often unclear how they fit into the bigger picture. The top-line Rmb4 trillion number has also been questioned, as it seems to incorporate previously announced spending. But the general sentiment is that the stimulus will contribute between 2 and 4 percentage points to GDP growth in 2009, getting the annual rate close to the government’s 8% target.
Of course, in leading the stimulus efforts, Hu Jintao can call the shots in a more commanding way than many. None of President Obama’s difficulties in having to get proposals approved by an opposing party, for instance. And newspaper reports this week indicate that China’s banks, with their large state shareholdings, have got the message (granting $235 billion of new loans in January alone). Compare this with the UK, where Prime Minister Gordon Brown flits between beseeching and browbeating local banks to lend more freely.
In fact China’s financial sector suffers less from the toxic debt and super-leveraged balance sheets now emasculating its western peer group. Inflation – the bogeyman in policy terms so recently – is also much less of a concern than it was only a few months ago. Lower international commodity prices are also helping to bring down energy and other input costs.
So, with money to spend and a leadership intent on spending it quickly, the opportunity for Beijing’s response seems hopeful. But there are caveats to this rosier picture. We cannot assume that Beijing’s policy decisions will be faultless, for example. Pieter Bottelier at John Hopkins University has argued that not all of China’s current slowdown is a result of the international credit crunch and subsequent economic crisis. In his analysis, Beijing over-tightened in response to growing fears of inflation after 2007. This led to a collapse in the property and construction sectors, which then generated job losses exceeding those in the export-driven manufacturing sector.
Even if the right policy decisions are made, will they be implemented effectively? Shanghai lawyer Yan Yiming, who has built a reputation defending the interests of minority shareholders in China, is featured in a number of the Chinese newspapers this week calling for greater scrutiny of the stimulus spending on offer. As he tells Xinmin Weekly, now more than ever is a time to heed a National People’s Congress pronouncement that “power be exercised in the sunlight.” Without sufficient scrutiny, he fears that much of the stimulus impact will be lost to corruption.
A third threat is that China believes it has been here before and can replicate tactics that may now be out of date. The domestic stimulus package delivered in the aftermath of the Asian financial crisis in the late 1990s did receive favourable international coverage but the problem, says Michael Pettis of Peking University’s Guanghua School of Management, is that last time round China was boosting a much smaller economy with a lot of fixed asset investment. This underpinned a surge in exports, which the world then bought up happily.
It’s different this time, says Pettis, as global demand has been credit crunched – Chinese exports were down 17.5% in January year-on-year. So a supply-driven fixed asset investment approach won’t pay the same dividend. In the longer run it should help China’s productivity but Beijing will be more concerned with creating jobs and maintaining living standards today.
© ChinTell Ltd. All rights reserved.
Sponsored by HSBC.
The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.