Banking & Finance

Problems turning off the tap

Hubei province announces a stimulus plan that’s 10 times its GDP

Hubei plans a lot more of these

Over the past 100 years the central province of Hubei has twice fomented revolutions. In 1911 it was the starting point for a revolt that toppled the Qing Dynasty – in the process replacing thousands of years of imperial rule with a new republic. And in 1966 it was the place where the 73 year-old Mao Zedong chose to go for a swim – and launch his Cultural Revolution.

Hubei is in the headlines again, and perhaps future historians will see events once more as a ‘revolution’ of sorts.

In recent issues WiC has spilled much ink on the evolving tensions between the country’s Beijing-based leaders and its local governments (see WiC53). The main bone of contention is economic policy. Two years ago, the central and local governments were on the same page: to ensure 8% GDP growth and full employment, they fought the global financial crisis hand-in-hand with a $586 billion economic stimulus package.

It worked: indeed, perhaps too well. With the first quarter’s GDP growth surging to 11.9%, the country’s top leaders have concluded that the danger now is of overheating.

Accordingly they’ve ordered banks to slow their lending and are quietly paring back stimulus spending. Worried about local government finances – which veered out of control on borrowing to build stimulus-related infrastructure – the leadership has been ordering provincial and city bureaucrats to pare back their construction plans.

Which brings us back to Hubei. It has recently announced a new ‘investment’ plan worth Rmb12 trillion ($1.75 trillion). The newspaper 21CN Business Herald is calling it an “unprecedented” amount.

To put the size of Hubei’s plan into perspective: it is around 10 times the province’s GDP and envisages a total of 37,600 projects.

If those numbers don’t seem sensational enough, consider this: Hubei’s plan is three times as large as the economic stimulus package that Beijing launched in 2008 (for the entire country) to combat the worst global recession since the 1930s.

Far from winding down the stimulus, Hubei’s plan looks instead to be upping the ante. For the bosses in Beijing the sheer scale of the thing is an affront. Sarah Palin may have popularised the concept of “going rogue” but Hubei’s local bureaucrats have taken it to the next level.

The province’s Development and Reform Commissioner, Xu Kezhen is quite blasé about the whole thing. He says the province’s growth has mainly been driven by state-led investment for some time, and that such spending – mainly on infrastructure – accounts for “more than 70% of Hubei’s economic growth.

In this plan more than Rmb3 trillion is devoted to 1,780 infrastructure projects with airports, ports and railways being the biggest component. “Transport projects will help consolidate the hub status of Hubei in the centre of China,” says Xu.

“Most of the investment plan will be implemented by 2012,” confirms Wang Yuxiang, deputy director of the Hubei Provincial Development and Reform Commission.

The 21CN Business Herald is far from convinced, especially on how Hubei intends to fund its spending spree. The newspaper estimates a funding gap of (at least) Rmb7 trillion.

But last week, the audacious local government gave the newspaper part of the answer. The province announced a scheme to merge five municipal lenders to create a new financial institution: the Bank of Hubei. “The new bank, with stronger financial figures, will be able to engage in bigger lending volumes and undertake a greater number of large projects,” reports the 21CN Business Herald. “The bank could provide part of the funding for a massive planned provincial stimulus package.”

The situation in Hubei is not unique. In fact, it is evident – to a lesser extent – in most of China’s provinces and major cities, all of which will need some weaning off their stimulus bottle. This much was recognised by Wang Jun – vice minister of finance  – when he recently commented that withdrawing stimulus was much harder than introducing it. “It’s not like the Qiantang [a major river in the country’s southeast] which floods each August and September and then leaves quietly,” he said.

The central authorities – including the banking regulator and the Ministry of Finance – have discovered that local governments are often ready to take a belligerent line. One contentious issue is the fate of what are termed ‘local financing platforms’. These were first mentioned in WiC on February 5 (see issue 48) and have since become a cause célèbre in the international press as well as China’s own media.

They were set up during the financial crisis to fund infrastructure projects and to help local state-owned firms get loans from the big state banks – all ostensibly guaranteed by the local governments.

The problem is that the borrowing levels – by one American academic’s estimate now at Rmb11 trillion – far exceed the means to repay. As reported in WiC51, these financing platforms could land the banks with as much as $493 billion of bad debt.

To rein in the problem, the Ministry of Finance invited bureaucrats from 18 provinces and cities to closed-door meetings. The plan was to publish a new set of regulations on local financing platforms, curtailing their ability to borrow new money and in many cases agree their gradual winding up. But as the China Economic Weekly reports, “Local governments expressed dissatisfaction with some of the tough views in the draft regulations and therefore resisted.”

The “problem”, says the newspaper, is that the local governments don’t want the financing platforms to be “interfered” with, because it will inevitably “lead to the cancellation of certain projects”. Accordingly, no draft of the regulation has yet to emerge – thanks to the local governments’ intransigence. This is no small victory for the provincial bureaucrats. In Hubei they might even call it “revolutionary”.


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