China Stimulus Move Debated

Political pressure may spur calls for faster growth.
An analysis by Michael Lelyveld
2012-05-28
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Workers inspect bottles of corn oil produced at a factory in Zouping, northeast China's Shandong province, May 9, 2012. Chinese manufacturing contracted in May for the seventh consecutive month as exports deteriorated.
AFP

Predictions of a new Chinese stimulus package are rising amid concerns that the government could be tempted to end its inflation-fighting policies too soon.

On May 20, Premier Wen Jiabao raised expectations of an economic boost for slow growth rates during a visit to central China's Hubei province.

"The country should properly handle the relationship between maintaining growth, adjusting economic structures and managing inflationary expectations," said Wen, according to the official Xinhua news agency.

"We should continue to implement a proactive fiscal policy and a prudent monetary policy, while giving more priority to maintaining growth," he said.

Market watchers jumped on the growth part of the message, suggesting that more stimulus measures were in the works.

The Wall Street Journal online cited a "decisive shift in rhetoric" on the economy, quoting similar Wen remarks on state radio, while Bloomberg News said the comments "indicate the government might take more aggressive steps to support the economy."

But within days, official reports seemed to back away from signals that the market would see a big stimulus push anytime soon.

"China acts cautiously amid slower growth," Xinhua said in a headline to a news analysis on May 22. "Wen's remarks hinted that the government will more carefully ease its credit controls than in 2008 when it hurriedly injected 4 trillion yuan (U.S. $635 billion) into the economy," it said.

Struggling

The government appears to be struggling to find a compromise on a policy formula after April economic reports showed industrial output growth of 9.3 percent, its slowest pace in nearly three years.

Wen has vowed to bring down housing prices and inflation, while implementing structural changes to the construction and investment-led economy.

Markets are understandably worried that Wen will overplay his hand and push the economy toward recession after years of double-digit expansion.

But Derek Scissors, senior research fellow for Asian studies at the Heritage Foundation in Washington, argues that another stimulus package would be the wrong move to further Wen's goal of structural change, although it could satisfy political demands before new leaders take power next year.

"If you're just trying to make people feel a little bit richer for the next six months, then go ahead," Scissors said in an interview. "If the goal is some kind of long-term kick- start for the Chinese economy, you're just doing the wrong thing."

Concern

Official reports have voiced concern that the growth of fixed asset investment for the first four months of the year dropped to a near-decade low of 20.2 percent, which would still be considered a breakneck pace in most countries.

Private fixed asset investment, reported by the National Bureau of Statistics (NBS) for the first time, was up by a robust 27.3 percent from a year before.

While monthly inflation has dipped below the government's 4-percent target level, the economy is still feeling the aftershocks of the massive stimulus spending that played out in 2009-2010. Housing prices have started to fall, but they remain high.

Although the property market is considered "weak," investment in real estate development still rose 18.7 percent in the first four months from a year earlier, the NBS said.

"If you're really thinking about a long-term solution, adding more liquidity so you can pull it back out is not the solution," said Scissors.

In response to the April figures, the People's Bank of China (PBOC) reduced the reserve requirement ratio for banks by 0.5 percent on May 18, effectively pumping 400 billion yuan ($63.5 billion) into the economy.

The third such small step in recent months follows a series of stringent tightening measures that ended last year. But another big stimulus seems likely to set off another inflationary shock.

"You'd just be getting yourself deeper into a hole," Scissors said. But he added that the government may still respond to political pressure for a resumption of higher growth rates, even if GDP stays above Wen's slower-growth target of 7.5 percent for this year.

"We don't know what the policy is yet. I do know that people reacting as if the sky is falling are not reacting sensibly for the long term," said Scissors.

Popular resistance

It is unclear how much time the government will give its monetary policies to work on property prices, but there have been signs that popular resistance may be slowing the campaign to drive housing costs down.

The official press has reported numerous protests against price cuts from homeowners who invested when the market was high. Nearly 20 such demonstrations have broken out at real estate offices in Hangzhou, the capital of eastern Zhejiang province, this year alone, the official English language China Daily said.

"Although the protestors' requests have no legal merit, some developers have become more cautious in adjusting their prices as a result of the protests," Xinhua said.

In one case, a crowd of 400 homeowners smashed up a real estate office in the Zhenhai district of Zhejiang's Ningbo city and threatened to block an expressway, China Daily reported.

The resistance suggests on the one hand that the government is under political pressure, but on the other, that its economic policies have not had time to work.

Gary Hufbauer, senior fellow at the Peterson Institute for International Economics, said the incidents may delay the effects of the government's policy.

"Often there's this view that prices should either go up or be stable and they should never go down," Hufbauer told RFA. "They don't expect that. Then, there's an effort by developers to contain the discontent by not marking down their remaining properties."

"People will learn that property prices can go down, as well as up," he said.

Scissors said that even if the protests remain relatively minor, they may affect the government's responses in the months before leadership changes and in the wake of concerns about the ouster of Chongqing's former Communist Party secretary, Bo Xilai.

"They're very sensitive to populist unhappiness," said Scissors. "Minor protests in this year can get oversized reactions. I would think that at both the provincial and national level, there is a very careful and wary eye out for people who are going to go out into the street because they're upset."

Comments (1)
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Zhuubaajie

from Hong Kong

Adding liquidity for its own sake is wrong. But adding liquidity to grow specific industries can be a very powerful and purposeful move. Chinese construction firms enjoy a 30% cost advantage over Western ones. Beijing has the capital to fund infrastructure projects. This is not the time to be timid. It is time to go all out and grab meaningful market share in international infrastructure building.

May 28, 2012 02:57 PM