Once a good idea, is not always a good idea. Stimulus packages, once hailed as an economic messiah, has lost its steam and China runs the danger of overdoing it.
In defiance of conventional wisdom, the city government of Changsha in central China launched a $130 billion (Dh478.14 billion) investment stimulus programme. The money, the sourcing of which is not exactly clear, would be spent on renovating the airport, subways, rundown areas and building exhibition halls. Economists estimate that the stimulus figure being bandied around is 147 per cent of Changsha’s nominal GDP of 2011, or 1.8 per cent of China’s national economic output — a figure completely out of proportion.
Yet, authorities at Beijing have given approval to a number of massive stimulus plans announced by local governments — be it Guizhou, in southwest China, which came up with a 3 trillion yuan (Dh1.73 trillion) eco-tourism development plan or Wuhan, central China, which wants to invest 420 billion yuan for inter-province transportation. Ningbo, a rich port city in the east, will implement 24 stimulus measures while Nanjing plans major incentives to increase sale of autos and flats.
These grandiose plans and subsidies by local governments have caused alarm among a section of bankers and even the public who fear wasteful expenditure and heavy debt risks. Far from generating confidence, news of the stimulus, announced late in July, was perceived as a panic reaction by local governments against Beijing’s bid to slow down economic growth and curb the property market. Market impact negative
Little wonder that the markets continued to react unfavourably to the news, brushing aside any prospect of the stimulus acting as a steroid to the sluggish economy. The Shanghai Composite tumbled 13 per cent earlier in the week from this year’s high recorded in March. Disappointing company results, slowing export growth and negative sentiments have put stock valuations at an all-time low, forcing fund managers to send out mixed signals. While some investors are willing to buy shares now with market going so cheap, others prefer to wait out and see the impact of the local stimulus plans.
The trouble is, the economics of local governments does little to inspire confidence. In the first half, their aggregate spending increased 24 per cent to hit 4.5 trillion yuan, whereas the central government’s expenditure rose by only 9 per cent. If stimulus spending is added to this volume, not only is there a danger of half-done projects, but a very real danger of industrial overcapacity. At the moment, 21 of the 24 major industrial sectors face serious over-production problems.
The biggest concern of course is access to funding. Local governments have seen revenues from land sales tumble due to government policies to curb the sector, and banks, one of the major financing sources, remain laden with bad loans leftover from previous stimulus plans, making credit ever harder to obtain. Provincial debts now hover above 10.7 trillion yuan, a figure that could soon be a ticking time-bomb.
Not really a stimulus
There is a growing view in China that stimulus crutches should be taken away now that the economy has matured and China is completely integrated with world markets. Its model of maintaining a high ratio of investment to income has become expensive and unviable. During most of its peak growth period, China supported investment with its own savings. Households and the corporate sector each accounted for about 40 per cent of national savings, and the government for the rest. Corporates got access to cheap capital due to a low interest rate structure and, as some economists point out, was essentially a financial transfer of household savings to the corporates. Although Chinese households benefited from rapid economic growth, this model has outlived its utility. A financial system artificially guided by the state may no longer have the stomach for stimulus doses.
The writer is a freelance journalist based in China.