SHANGHAI - In China, the government's 4 trillion yuan (US$586 billion) economic
stimulus package announced last week reminds people of massive state investment
in infrastructure projects after the 1997 Asian financial crisis, only this
time the scale is much bigger.
Another difference is that a decade ago, the then Chinese premier Zhu Rongji
did not announce any overall "stimulus package" but just increased government
investment each year during his office term (1998-2003) to offset the negative
impact of the financial crisis.
But to repeat what Zhu did on a larger scale may not help the economy attain a
more balanced development, as advocated by
President Hu Jintao with his concept of "scientific development".
Economists are concerned that the stimulus package or "new deal" will simply
follow and even reinforce the old growth mode of relying on government
investment. This mode encouraged economic growth after the Asian crisis but its
shortfalls are obvious: industries boosted by heavy government investment
became overheated, environmental pollution worsened, prices of resources
jumped. So much so that Zhu's successor, Wen Jiabao, had to impose
macro-economic controls shortly after he took over the reins.
Over the past year, China's economic growth has been powered by fixed-asset
investment and exports. What China needs now is a true change of course -
long-term sustainable growth supported by expanding domestic consumer spending,
analysts say. In this regard, the stimulus plan may not be of help. Instead, it
is likely to rely even more heavily on infrastructure investment to sustain
growth.
The State Council announced the 4 trillion yuan stimulus package on November 9
after three interest rate cuts by the central bank had failed to revitalize the
economy.
The 10-point stimulus plan covers low-income housing, rural infrastructure,
transport infrastructure projects, medical care, education, environmental
protection, technological innovation and disaster-relief. The central
government will finance 30% of the package directly and the remaining funds
will come from local governments, banks and companies.
While the plan did not say how much of the spending would be on new projects
that are not already covered by the government budget, or how the money will be
distributed among these areas, it is widely believed that transportation
sectors such as construction of railways, highways and airports will be a
priority. Relevant authorities are now competing to grab a bigger share of the
cake. It is expected railways will take the lion's share.
"Following the Asian financial crisis, the state concentrated its investment on
construction of highways to boost domestic demand. This time, the focus will be
on building railways," He Huawu, chief engineer at the Ministry of Railways,
told the media.
According to China's 11th Five-Year Plan (2006-2010), 1.2 trillion yuan will be
invested during the period to extend the country's railway network by 20,000
kilometers, from 70,000km in 2005 to 90,000km in 2010. Beijing has already
approved expansion of this plan, according to Yang Zhongming, head of the
Ministry of Railways' Development and Planning Department.
To date, the State Council has approved construction of 23,000km of new
railways under the 11th Five-Year Plan, with total investment of about 2
trillion yuan, Yang told the media last week.
Under the stimulus package, the state will approve construction of an
additional 10,000km of new railways in 2009 with total investment of about 1
trillion yuan, according to Yang. He said railway construction next year, which
will consume 20 million tonnes of steel, 120 million tones of cement and
provide 6 million jobs, will contribute 1.5 percentage points to the country's
growth in gross domestic product.
That therefore means at least 1 trillion yuan from the stimulus package will go
to railways.
In competition, the Ministry of Communications announced an ambitious plan to
invest 980 billion yuan on average each year in the next five years to build
new highways across the country, including in the vast countryside, and ports.
That proposal has yet to be approved by the State Council (cabinet).
Although China has striven for a market-oriented economy in the past 30 years,
such state-driven investment projects have been a major impetus to economic
growth.
While the "new deal" includes spending more on aid to farmers and the poor, and
increasing personal incomes, few details or financial figures have yet been
forthcoming. There is no tax break for individuals, even though individual
income tax accounts for about 6.5% of state revenue.
The stimulus package has both good and bad implications for companies.
Manufacturers in particular will benefit from long-awaited tax reform, which is
expected to save corporations 120 billion yuan. However, the large scale of
investment on infrastructure risked further damaging the environment and
enhancing government monopolies in certain industries, according to Ma
Guangyuan, an economist with the Chinese Academy of Social Sciences (CASS).
"The 'new deal' does not stray away from the old path of boosting the economy
with government investment in infrastructure," Ma commented in an article
published by the influential Southern Metropolis Daily.
China produces more than it can consume, and the overcapacity in some
industries will become more obvious as exports slump in the global economic
downturn. Heavy new investment might worsen overcapacity of certain industries
such as steel and cement, the Southern Metropolis Daily said in its editorial.
The huge state investment "will certainly squeeze out some private investors",
Yuan Gangming, an economist at Tsinghua University, said in an interview with
the International Finance News. "But from a long-term perspective, private
investors, rather than the government, should be the driving force of the
economic growth."
Fear of corruption
There are also fears that government-run projects will breed corruption, as in
the construction boom after 1998. In China, government-funded infrastructure is
considered a "high-risk" area in regard to official corruption because
officials have the power to handle land requisition and construction contracts.
The central government has ordered the stimulus plan to be implemented
"promptly" - the 4 trillion yuan has to be spent by 2010. The first installment
of about 100 billion yuan for this year has already been allocated to 11
central government departments.
"The money is required to be spent within the remaining 100 days of this year.
Governments at various levels have to race time to spend the money," the
International Financial News reported, quoting an unnamed official with the
National Development and Reform Commission (NDRC), which oversees the
allocation of investment funds.
Since the plan was announced, officials from far and wide and from numerous
departments have lobbied the NDRC for a share of the package. In China, a local
official's promotion is linked to the economic growth of the area under his
jurisdiction, and so it's crucial for officials to attract as much investment
as possible to their regions. Chinese media described the stimulus money as a
"trillion-yuan banquet" for the lobbying officials.
Fearing that some of the money might end up in the pockets of corrupt
officials, the Central Commission for Disciplinary Inspection, the country's
top anti-graft watchdog, has set up six inspection teams, which will make
alternative trips to the provinces to ensure the funds are properly spent. The
teams are now making their inspections in six provinces - Guangdong, Hainan,
Shandong, Anhui, Guizhou and Qinghai.
The public and the government have good reasons to be cautious - corruption is
rampant in China's government-run projects. At least 10 minister-level
officials ended up in prison for corruption in the construction spree following
the 1997 financial crisis.
On the Internet, people joked that the central government should give the 1.3
billion citizens 3,000 yuan each rather than give the money to officials, whom
they said would certainly embezzle it.
Weak consumer spending
China's strong economic growth has been based on exports and investment at the
expense of consumer consumption. Although consumer spending is rising at a
faster speed than the GDP, its percentage of GDP is actually declining. In
1997, China's household spending accounted for 45.5 % of GDP, but in 2007 the
figure contracted to 35.4 %, official statistics show.
Last year, the value of exports was equivalent to 37.5% of GDP, up from 19.2%
in 1998. The country's growing production capacity has been absorbed by
exports. The high-degree dependence on exports makes the economy fragile in the
face of global financial crises.
Growth in industrial production in October fell to its lowest level since 2001.
Output grew by 8.2% year-on-year, down from September's 11.4%, official figures
show. A report by Citigroup economist Ken Peng said that was a bigger, faster
decline than any month during the Asian financial crisis a decade ago.
Signs of China's economic slowdown were seen even before the global financial
crisis. Increasing prices of property and resources, and labor costs, as well
as a worsening environment, showed that the old growth pattern was no longer
sustainable.
In the interview with the International Finance News, Yuan Gangming said,
"Despite the large scale of the infrastructure spending, if domestic
consumption is not truly activated, the macro-economy will probably experience
another cycle of rising and declining."
China has been trying hard to raise consumer spending in the past decade, but
with a big wealth gap and without a sound social welfare net, many families
still have little to spend and most save 20% or more of their incomes to pay
for healthcare and retirement.
"The quick fix is infrastructure spending, building up railroads and other
things," Frank F X Gong, chief Asia economist for JP Morgan Chase & Co, was
quoted by The Associated Press as saying. "But then the key thing is to
stimulate consumption by building up the necessary social infrastructure."
To a large extent the current stimulus plan reminds people of China's stimulus
plan following the 1997 Asian crisis. Zhu pumped money into infrastructure
construction with a focus on highways. To raise the funds needed, the Chinese
government issued bonds worth about 700 billion yuan during Zhu's five-year
term. Investment in construction of new express highways increased each year
during the period.
As a result, the length of new highways built was 1,741km in 1998, 2,872km in
1999, 4,350km in 2000, 3,000km in 2001, 5,583km in 2002 and 4,600km in 2003. By
end of 2003, total length of China's express highways was 29,800km.
But China is facing a different reality now. Many industries are already in a
state of overcapacity, which is expected to get worse as exports slump.
China should take the current financial crisis as a chance to restructure its
growth mode, reducing its reliance on exports and investment while increasing
consumer spending.
The stimulus package makes some efforts toward this goal. It sets out an
intention to build more low-income housing, to boost farmers' income, to better
finance education and healthcare. With public concern about the high costs of
housing, education and medical care prompting them to spend, and the low income
of the country's hundreds of millions of farmers, government action to lower
these costs could encourage people to spend more on other goods and services.
But the package mentions no concrete measures in these areas, and people have
yet to see how substantial the efforts might be. If this opportunity is not
grabbed, China may face even bigger problems in the near future than now.
Stephen Wong is a freelance journalist based in Shanghai.
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