Fifty shades of stimulus

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No this is not an update on the fortunes of Dongguan’s local economy, which was hit earlier this year in a ‘strike yellow’ crackdown. CCTV’s undercover reporting that revealed many of Dongguan’s hotels and saunas offer additional services, came as a “deep shock” to the local mayor, but surprised no one over the age of 12.

But in the sense that the true nature of Dongguan’s real economy was an open secret not admitted by the government, so too is this year’s series of economic stimulus measures. In response to the financial crisis, the central government launched a massive RMB 4 trillion stimulus package in 2008, which although hailed as a success at the time by domestic and foreign commentators, has since been criticised by domestic Chinese economists. (See chiecon post from April). Hence this year, ‘stimulus’ is now a taboo word in Beijing, replaced by the more wholesome ‘stable growth’.

The ‘China Dream’ of the new administration economically speaking involves reforming the government and market relationship, relying on innovation to spur growth. The problem is innovation can’t be shipped in bulk from far corners of the world, and assembled by migrant workers in factories. It takes time to nurture, from the classroom to boardroom, leaving local governments with no choice but to rely on the old work tools of fixed asset investment and fiscal stimulus.

This point is worth emphasising, as many commentators might talk of the economic reform in terms of ideological battles between factions in the ruling party. But these hypothetical discussions ignore the economic reality that China’s channels of investment are still limited, and that much work remains in the Central and Western regions to build basic infrastructure. For now at least, innovation comes in the form of various ways to boost the domestic economy, without explicitly launching stimulus packages.

This Chinese article from CNFOL (Beijing), translated by chiecon, covers such points, backed up by comments from academics working in various central government institutions.

The Chinese government’s economic plans for the next half of the year were discussed on June 29th at a meeting of the Political Bureau of the CPC Central Committee. Wang Jun 王军 from the China Center for International Economic Exchanges stated that “from the meeting information that’s been disclosed, stable growth and promoting reform are the key points for the next half a years economic work”.

Yet an insider notes that “of the four targets of stable growth, promoting reform, organisational restructuring, and raising people’s livelihood, the government’s policy tools are in reality all centered on maintaining stable growth”. In the future the government will pursue the integration of government and a more effective market, by slimming down government powers and stimulating market forces.

The reasons given for the focus on maintaing steady growth are due to weakening conditions abroad in both developed and emerging markets. China’s exports have been impacted, currently off this years target of a 10% increase. Another international factor is other countries with lower labour costs, producing high volume low-end products, replacing China in the supply chain.

Wang Jun notes “especially with the US economic recovery falling short of predictions, and the tapering of QE, it’s hard for China not to feel any negative impact”.

Domestically, the economy still needs time to resolve the problem of over-supply in some industries. Local government debt burdens are curtailing investments, and the property market correction means the benefits of economic development are not as great as before.

A further dose of reality is added by State Council Research chief Xiang Dong 向东 who said “despite the doubts, its hard to deny that investment is still China’s main lever of economic growth”. At the recent government meeting it was made clear that the aim for the next six months is to encourage more efficient investment channels, and release the potential of private investment.

This echoes Li Keqiang 李克强, who previously stated that above all else, China’s economic growth must be maintained within a “reasonable range”. Yet he stressed the need to utilise more private capital to cover weaknesses in the current development model. This will not only improve peoples livelihoods and increase employment, but also optimise development in an efficient manner.

At this year’s State Council executive meeting, observers noted major investment initiatives were mentioned six times, including: renovating shantytowns, railway construction, large scale irrigation works, rural finance and supporting the development of small and medium sized business.

Railway construction and irrigation investment combined aim to surpass RMB 1.2 trillion. Xiang Dong notes this investment is still “needed in Central and Western areas, to ensure a network with full coverage”. Anyone who has experienced the frustration of traveling in rural Chinese areas would definitely support this!

But other investment initiatives appear to probe new investment channels. For example, the State Council instructed the PBOC to lend the China Development bank RMB 1 trillion, in order to provide housing financial support. The aim is to support shantytown renovation, whilst reducing funding costs.

With respect to supporting rural and SME finance, deposit-reserve ratios have been reduced twice. On June 30th the CBRC announced adjustments to commercial banks loan-deposit calculations. Some institutions estimate this could allow banks to release an extra RMB 2 trillion in loans to SMEs, rural finance and the service industry.

An authoritative source said “one can see that this time round, investment channels are different to before. Rather than simply stimulating general growth, investment is more targeted at specific areas, aiming to benefit the real economy, improve people’s livelihoods, and increase the effectiveness of investment. This will lay the foundations for continued mid to long term growth”.

So will this have the happy ending the government hopes for? According to Xiang Dong “more innovation is needed in the Eastern region to maintain growth”. And Wang Jun believes that continued reform is the key. “If local governments are unable to push through reform, the central government must over the next half a year emphasise the importance of reform, and eliminate reliance on government investment”.

(Article not to be copied or reproduced without permission or citation).

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