Building Binge May Defy Beijing

Huge local stimulus surprises China's central government.
An analysis by Michael Lelyveld
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A 30-story hotel under construction in Changsha, Dec. 26, 2011.
A 30-story hotel under construction in Changsha, Dec. 26, 2011.

China's government faces rising resistance to its inflation-fighting policies from cities and provinces as they push their own stimulus programs to spur lagging growth.

Last month, Beijing seemed stunned when Changsha, the capital city of central Hunan province, announced a giant 829-billion yuan (U.S. $129.8-billion) stimulus package. The planned investment in 195 projects includes airport construction, a subway and urban infrastructure, state media said.

The massive spending for the city of 7 million is about one-fifth the size of the 4-trillion yuan (U.S. $626.4 billion) stimulus package that the central government approved for the entire country in 2008.

On July 25, the State Council said it would promote development in six central provinces including Shanxi, Anhui, Jiangxi, Henan, Hubei and Hunan, the official Xinhua news agency reported.

But it is unclear that the government was prepared for a local spending spree as large as this.

"Social capital" instead of government spending should play a dominant role in any stimulus, warned Zhang Changchun, director of the Institute of Investment at the National Development and Reform Commission (NDRC), China Daily reported on Aug. 6.

Local stimulus plans "have sparked worries over rising debt and returns on investment," the official English-language paper said.

Changsha may be leading the way for local officials to splurge on exactly the sort of resource-depleting building binge that the government has resisted to pull China out of its slower-growth trend.

Avoiding inflation

Premier Wen Jiabao has said repeatedly that Beijing will not float another big stimulus that would renew inflation, despite gross domestic product (GDP) growth that slipped to 7.6 percent in the second quarter of the year.

An NDRC statement denied plans for any "massive" stimulus in June.

"The government wants to moderately expand investments, but there will be no stimulus plan this time," Wang Yiming, vice director of the NDRC Macroeconomic Research Institute told The Wall Street Journal last month. "All investment projects had been previously planned."

Instead, the government has opted for "fine-tuning" with a more cautious stimulus that relies on moderately looser money supply, eased bank lending and faster project approvals.

But the sum of local spending could quickly approach inflationary heights unseen since 2010.

The government of Anhui province has announced 81 major projects with investments of 45.7 billion yuan, according to China Daily.

Nanjing, the capital of eastern Jiangsu province, has also unveiled a 30-point plan that includes incentives for car sales and affordable housing, Bloomberg News said. Ningbo city in Zhejiang province also plans 24 stimulus measures including tax cuts and support for small businesses.

'Uncaged tigers'

What began as a no-big-stimulus policy may be turning into more than the government planned.

University of Pittsburgh economist Thomas Rawski said the Changsha overreaction is reminiscent of the 2009 period when local officials were compared to "uncaged tigers" for their fervent response to stimulus plans.

"This is a system in which people in various segments of the government and different parts of the country look to the center for signals about what initiatives are being encouraged," Rawski said in an interview.

"Then they rush to line themselves up with what they see as the central initiatives in the hope of getting large-scale support," he said.

The race is a competition not only for available funding but also to advance personal goals.

"We know very well that the promotion and career prospects of local government officials at all levels are very much tied to the fortunes of the local economies," said Rawski.

But the return of big stimulus spending risks the resurgence of inflation, which the government has fought for the past year to bring under control.

"The Chinese government finds itself in the exact sort of dilemma that all the other major governments are in," Rawski said. "The circumstances are different but in every case, the short-term remedies are the exact opposite of the long-term requirements."

Rawski said China's economy seems to be losing momentum "very rapidly," and he suspects that official GDP numbers are "way too high." The government may have no choice but to unleash local investment pressures, although the results will be more inflation and bad debt.

"In an ideal world we wouldn't let local governments do this sort of stuff," he said.

Local vs. central

The lending surge that will be needed for the new stimulus plans is likely renew worries that surfaced last year with reports that local government debts hit 10.7 trillion yuan (U.S. $1.7 trillion) at the end of 2010.

It is unclear how far Changsha's huge construction plan has gone beyond the central government's wishes after Wen's repeated insistence on sustainable development and rebalancing the economy.

In a statement that appeared to border on defiance, Changsha's Communist Party secretary Chen Runer was quoted as saying that "economic pressure on the city could not be ignored," according to state media.

"It's defiance, but in a way it's playing by the rules because the only way you can get promoted in China as a cadre is through economic growth," said Lowell Dittmer, a political science professor at University of California, Berkeley. "That hasn't changed."

The free-spending local plans may raise troubling control issues as the central government prepares for the upcoming Communist Party Congress.

"They're losing control, because economics up to now has been pretty much free," said Dittmer. "As long as you can keep the growth rate up, you can do anything."

Social strains

Dittmer suggested that social strains from slowing economic growth are being felt at the local level first, putting local responses ahead of the central government's curve.

"If they have a downturn in growth, they have higher unemployment and they have the higher possibility of demonstrations," said Dittmer. "It's a powder keg."

Given the risks, the niceties of longer-term goals for sustainable development may seem like a luxury that local authorities cannot afford. But plans like Changsha's could make a shambles of the central government's policies.

"They're caught between a rock and a hard place," said Dittmer. "If they allow this investment binge to go on again, it would not contribute to the rebalancing they really want."

Official economic reports released last week seemed to strengthen the hand of those who would push bigger stimulus moves now.

Most notably, consumer inflation fell to a 30-month low of 1.8 percent in July, the National Bureau of Statistics (NBS) said. But state media quoted economists warning that the dip would be short-lived due to the "base effect" of high inflation last year.

Fluctuating food prices may also have skewed the monthly numbers with the effect of recent floods and plunging pork costs.





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