Doubts bedevil China's stimulus
By Antoaneta Bezlova
BEIJING - World politicians and economists have cheered the US$586 billion
stimulus package unveiled by Beijing last month, but there are misgivings.
As more details emerge about the allocation of money and spending plans, doubts
are mounting as to whether the package is capable of "rescuing the world" from
economic crisis and even whether it can succeed in preventing the domestic
economy from slowing down sharply.
"The world is too big to be saved by China," says Liu Jin, financial expert and
professor at the Cheung Kong Graduate School of
Business in Beijing. "This package is not designed to solve imbalances in
global economic order; it is more of a political statement that China is ready
to deal with the crisis. China is poor and has a lot of structural problems
that needed tackling even before the crisis."
Global growth forecasts have all dropped and China is among the most vulnerable
to this. The World Bank's latest China Quarterly Update predicts growth in 2009
will slow to 7.5% - dipping below the accepted safety line of 8% economic
growth necessary for China to generate enough jobs and keep social unrest at
bay.
Writing in a flagship magazine of the Communist Party, Premier Wen Jiabao
seemed seriously worried: "We must be crystal clear that without a certain pace
of economic growth, there will be difficulties with employment, fiscal revenues
and social development."
The latest report by the United States government's National Intelligence
Council on the shape of the world in the next 20 years also sounded an alarm.
As well as being the new center of power and predicted to become the world's
second-largest economy, China is portrayed as a potential trouble spot.
"For the better part of two decades, the world has been focused on the
extraordinary growth within China, and now it looks increasingly likely that it
will slow," says Jacqueline Newmayer, of Long Term Strategy Group and a
contributor to the report. "That could create significant instability in the
country and surrounding regions, with people questioning the legitimacy of the
communist government".
To stimulate growth, Beijing approved the $586 billion stimulus package,
described by some as the "New Deal with Chinese characteristics" and linking it
to president Franklin D Roosevelt's New Deal to rescue the American economy
during the Great Depression in the early 1930s.
The proposed stimulus package, which is to be spent from now until 2010,
includes a mix of investment and consumption-boosting elements tapping areas
such as the construction of roads, railways and other infrastructure, budget
housing and reconstruction of the areas devastated by the May earthquake in
Sichuan province.
While spending on health, education and poverty relief are mentioned in the
plan, the emphasis there is on construction too, for example of local health
clinics or the renovation of schools. Only one of the stimulus policies is
directly linked to social spending, capturing social security, pensions and
income support.
With so little of the money going into spurring household spending, economists
have questioned the plan's chances of releasing the potential of China's huge
savings. The country's savings rate in 2007 reached 51.2% of gross domestic
product (GDP), compared with the already remarkable 37.7% rate in 2000.
"The new plan is actually a classical Keynesian formula," says Xia Yeliang,
researcher at Foreign Economic Studies Center of Beijing University. "We tried
it in 1998 [after the Asian financial crisis] and we know it works. The
difference though is that China at the time needed the entire infrastructure
that was built. This time around we must focus on infrastructure and more. The
quality of spending is very important, and we must make sure it benefits
ordinary people most of all."
Officials have revealed that only 25% of the announced spending will come from
the central budget, with the rest of the funds to be supplied by the
state-owned companies, local governments and state banks.
After a relatively prolonged period of austere fiscal and monetary policy, the
relaxation of controls on investment now is being described by the media here
as a "scramble" and "stampede" by companies and officials to get a piece of the
"state pie". The economic boom has filled the coffers of many localities with
tax revenues and officials have been lobbying for a change of policies to allow
them the freedom to invest.
"We need to learn from our historical mistakes," cautioned the China Times.
"Without proper supervision at the local level, the investment of so much money
over a short period of time could leave the country littered with 'beauty show'
and 'face projects' of little value to anyone but officials themselves".
Sixty percent of respondents to a poll conducted by the paper doubted whether
the stimulus money would be invested in the areas designated by Beijing for
development.
Many economic observers say investing in a stronger social safety net and
reduction of income inequality and not infrastructure building should be the
priorities at this time. They say a disproportionate focus on boosting
investment risks aggravating imbalances in the economy.
"There is no doubt that an increase in the investment in health and education
would contribute to boosting domestic demand," says Michael Pettis, professor
of finance at Guanghua School of Management at Beijing University. "If the New
Deal leads to aggravation of income inequality, then it doesn't solve any of
China's problems".
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