Is China's Stimulus Plan enough?

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Macroeconomics

I will start by saying I cannot provide a link to the article I am quoting from but should anyone wish to see the original text drop me an e-mail and I will gladly forward a copy. The analysis was written by Wang Shuo, acting editor in chief of the Finance Magazine Caijing, and asks four basic questions regarding the Chinese economy.

Has the Chinese economy stabilized? Wang suggests it has, for now. But despite official assertions that national champions are doing better every month and people are starting to buy homes and stocks again Wang does not see the crisis as over. In fact he is not convinced China will go through a V shaped recovery and points to two ongoing developments to suggest there are challenges ahead. First, the number of migrants who have lost their jobs since last summer is looking more like 30 million than the 20 million originally expected. This will create a break on the economy and illustrates the decline of largely export focused industries. Second, electricity consumption, (whatever previous commentators to MM have said it remains a key economic indicator) has been declining since March and (according to Wang) the decline is gaining momentum.

How important is the 4 trillion yuan stimulus package? The package is not what it seems. In reality, Wang claims the Chinese government actually plans very little. What they have done is given the green light to local governments to go ahead with plans already on the drawing boards and encouraged the banks to lend for those projections if they are able. So the lending has quadrupled in the first quarter compared to last year but much of the investment has been for historical priorities ” for an economy geared to exports.

Will the Chinese economy resume growth and lead other economies out of the global recession? No, the stimulus package will generate sufficient activity this year to keep the Chinese economy growing but how can an export oriented economy grow when its overseas markets are in recession or flat? If the US and Europe do not bounce back strongly in 2010 nor will China’s economy return to 10-12% growth. Can you see Europe or even the US generating 2.5-3.0% growth rate next year? The IMF is projecting growth in the US as zero next year and the average for Europe as -0.4%. China must generate internal demand if it is to maintain robust growth in the first half of the next decade. But this is easier said than done, as Yasheng Huang, a professor at the Massachusetts Institute of Technology argued this week in the Financial Times, that the government has prioritized development, particularly lending in the coastal regions and suppressed wages to support the export industries. These are long term trends that require long term solutions.
Does China need another stimulus package? Yes it does. The current one has in Wang’s words contained the sharp decline in the economy but it largely fails on two fronts. First, much of the investment is for the economy as it was before ” export focused, so more of the same will not boost domestic development once the road is built or the port is opened. Second, China needs a greener growth plan. there is a realization that the old path of big investment projects has led to unsustainable levels of pollution; the respite granted by the Beijing Olympics reminded city dwellers that there were blue skies above the permanent haze to which they had become accustomed. In Wang’s opinion, China needs a much more carefully thought out strategic stimulus package with a view to fast tracking where China wants to be rather than re-instating where it was.

–Stuart Burns

Comment (1)

  1. anon says:

    from the same vaunted publication cited above:

    “China’s nonferrous metal industry is facing severe pressures from overcapacity, the China Nonferrous Metals Industry Association warned…Despite the government’s orders to close projects with small production capacities, the association said that local governments may still prefer to expand small capacity projects while investing in new projects….According to Shang Fushan, deputy chairman of the association, China’s aluminum sector has been experiencing oversupply; meanwhile, pressure is also emerging in the copper sector.”

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