Turning off the taps

You think this recovery has legs?

Does the economy need more stimulus? A question being asked by policymakers in a range of national capitals at the moment. And Beijing seems to be no different. The Economic Observer reports that the central government has now paid out almost all of the Rmb1.18 trillion that it committed as part of its original 2008 stimulus plan. So, is it a case of mission accomplished?

A couple of months ago, many would have said no. A hardy group of bears trumpeted data that suggested a slowing Chinese economy. Some commentators even foresaw a double dip ahead. More stimulus would be required, they argued.

But in recent weeks the mood has lifted again. A slew of positive economic data has boosted arguments that the recovery is a robust one. The ‘purchasing managers’ index’ (a gauge of manufacturing health), as well as retail sales figures, and data on fixed asset investment (in infrastructure and factories) were all on the up last month.

The good news even allowed Premier Wen Jiabao to crow at the World Economic Forum earlier this week that China’s stimulus had helped to stablise the world economy.

Chinese leaders have made similar statements before. But their confidence on the country’s own economic health seems well-placed. “The economy is just moderating rather than melting,” has been the line taken by HSBC economist Qu Hongbin. In a research note titled ‘The engine is still humming’ he argues that domestic demand and continuing infrastructure spend will see GDP growth remain resilient at 9% in the second half, and through 2011.

Not everyone is so sanguine. “The rebound and recovery of China’s economy… relies on stimulus policies and global recovery,” warns Liu Yuanchun, a professor at Renmin University. The implication is that it is too early to wean the economy off government-directed support.

Then there are those who say the stimulus has been overdone, and that it’s causing inflation to spike. The August CPI (consumer price index) was up 3.5% on the previous year (the target is 3% for the year). Officially much of that is down to a 7.5% rise in food prices (not helped by recent floods).

But economist Andy Xie thinks that’s just wishful thinking.

“The land price is up 10 times in the last eight years,” he told Bloomberg last week. “That is a leading indicator for inflation, and people see that everything else is going to go up unless land prices come down.”

HSBC’s Qu has more of a ‘Goldilocks’ view of the economic climate. He thinks fears about food inflation are overdone, and that inflation in general will peak soon, meaning there’s no need to hike interest rates later this year.

Bottom line, says Qu: “August data broadly confirmed that resilient domestic demand warrants a soft-landing, implying no need for a policy U-turn.”

Regardless of who is right, there are indications of major issues with how the stimulus money was actually spent. The Economic Observer has been reporting on an ongoing audits by the National Development and Reform Commission (NDRC). What it discovered was “chaos”. Local governments failed to hold competitive bidding for contracts, ignored the necessary paperwork (land use warrants, environmental assessments, etc…) or simply diverted funds into their own ‘local financing platforms’.

Although it seems to have served its immediate purpose, it’s too early to judge just how efficient all that spend will prove in the longer term. But Xinhua reports that in Anhui’s capital city they’re pretty pleased with themselves. It quotes the Hefei Party Secretary, Sun Jinlong who has been boasting that in spite of the Rmb73 billion of construction spending “not one official was brought down for corruption”.

Famous last words, perhaps…

© 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.