China Takes Stimulus Steps

The government hopes smaller doses can cure economic ills.
An analysis by Michael Lelyveld
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Chinese Premier Wen Jiabao speaks at the World Economic Forum in Tianjin on Sept. 11, 2012, predicting the country's economy would "further stabilize" as recent measures take hold.
Chinese Premier Wen Jiabao speaks at the World Economic Forum in Tianjin on Sept. 11, 2012, predicting the country's economy would "further stabilize" as recent measures take hold.

After months of denying plans for a big economic stimulus, China's government has announced a series of steps that are starting to look like much the same thing.

On Sept. 5 and 6, the National Development and Reform Commission (NDRC) approved at least 55 highway, port, and rail projects valued at 1 trillion yuan (U.S. $157.7 billion), state media reported.

The list of 25 urban rail projects alone will cost over 800 billion yuan (U.S. $126 billion).

While the plans pale in comparison to the 4-trillion yuan (U.S. $631-billion) stimulus package unveiled in 2008, the spending programs have begun to pile up.

On Sept. 12, the State Council called for trade-boosting measures including faster tax rebates after August exports grew by only 2.7 percent from a year before, the official Xinhua news agency said.

Two days earlier, the Ministry of Housing and Urban-Rural Development said China had already invested 820 billion yuan (U.S. $129.4 billion) in affordable housing construction so far this year.

And a slew of city governments have announced stimulus programs of their own, although it is unclear whether these need Beijing's approval to proceed.

In one case reported in July, the government of Changsha in central China'sHunan province declared a huge 829-billion yuan (U.S. $130.7-billion) local stimulus plan including 195 infrastructure projects.

On Sept. 7, the city of Xuzhou in eastern Jiangsu province added its own 33.7-billion yuan (U.S. $5.3-billion) investment package of projects with state-owned enterprises (SOEs), Xinhua reported.

On the same day, Xu Lin, head of the NDRC's Fiscal and Financial Department, called for eased restrictions that would allow cities to issue their own bonds, a move that could open the floodgates of local financing.

How much?

How much will all this stimulus spending add up to?

"We don't know," said Harvard University economist Dale Jorgenson in an interview, but he added that it is still unlikely to be as large as the 4-trillion yuan program.

"I don't think it's going to be anywhere near that," Jorgenson said.

For one thing, China is unlikely to confront global economic challenges as serious as those of the "great recession" that started four years ago.

"We're not facing something like the crisis in 2008. This is not the Lehman Brothers bankruptcy," said Jorgenson, referring to the collapse of the investment giant that helped trigger the Wall Street crash.

To fend off that crisis, China's government called for massive infrastructure spending with effects that are still being felt.

The building boom drove the property sector into a speculative frenzy, while home prices and inflation soared over the next three years.

"They overdid it," Jorgenson said.

Faced with a public outcry over housing costs, Premier Wen Jiabao has pledged repeatedly that the government would avoid another big stimulus in favor of "fine-tuning" its economic policies.

Incremental approach

But a slide in August industrial output growth to a three-year low of 8.9 percent seems to be dragging the government back toward inflationary stimulus spending a bit at a time.

One reason for the incremental approach is that China's leaders are coming to the end of their terms with the ruling Chinese Communist Party's upcoming party congress, starting a transition that will run through next spring.

Major policy shifts may be left to the new government. In the meantime, the NDRC seems to be responding with smaller doses of stimulus, one after the other, to tide the economy over.

"These people are on the way out. They're handing over the reins," said Jorgenson. "This is crossing the river while feeling the stones."

'Policy experiment'

But the approach has frustrated markets and economists, who have been unable to get clear signals about the scope of the government's policy response.

"The authorities seem to be running a risky policy experiment to see how well the economy can hold up without any big dose of stimuli," said Societe General economist Yao Wei in a research note cited by Bloomberg News. "Although prudent, this approach is prone to large downside risks in the short term."

Speaking at the Asia-Pacific Economic Cooperation (APEC) summit in Vladivostok, Russia on Sept. 8, President Hu Jintao may have added confusion by saying that China's economy suffered from "the lack of balance, coordination and sustainability."

"We will boost domestic demand and maintain steady and robust growth as well as basic price stability," said Hu, according to Xinhua.

The comments seemed to imply criticism of Wen's conduct of economic policy. But they also "strongly hinted at further economic stimulus," The New York Times said.

At the World Economic Forum meeting in the northern port city of Tianjin, Wen defended his record, both four years ago and now.

"I want to make it clear here that it was exactly due to our resolute decision and scientific response that China was able to avoid factory closures, job losses, and the return of migrant workers to their home villages," Wen said on Sept. 11.

Speaking of the current crisis, Wen predicted that the economy would "further stabilize" as recent measures take hold.


While markets may be awaiting clearer signals on the final size of the stimulus, some economists say it doesn't really matter.

Derek Scissors, senior research fellow in Asia studies at the Heritage Foundation in Washington, said the announcement of the 4-trillion yuan program in 2008 was only a repackaging of projects that were already in the pipeline, not a new plan.

The figure was "not real, it was never real," said Scissors. "So, everyone should just put that out of their minds."

What really mattered was the wave of lending that swamped the economy, once banks were assured of government support. Scissors estimates that bank loans in 2009 may have reached as high as 9 trillion yuan (U.S. $1.4 trillion).

Public announcements of spending plans, like those in Changsha, count for very little because the projects often do not materialize, said Scissors. What counts is financing.

"The expansion comes from banks," Scissors said. "The problem they've had up to this point is that people don't want to borrow."

"The real question is do the provincial and municipal announcements mean that local firms will now borrow?" he said. "We haven't seen that yet."

One hopeful sign came on Sept. 11 as the People's Bank of China (PBOC) reported that bank lending in August rose 28 percent from a year earlier to 703.9 billion yuan (U.S. $111.7). The new yuan lending was a record high for the month, the official English-language China Daily said.





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