Page 2 of
2 SPEAKING
FREELY Beijing faces test in run-up to
'stimulus 2' By Niall
Coen
This newly accommodative monetary
policy saw interest rates cut five times in the
first year; new credit mechanisms established for
small and medium enterprises; and greater latitude
given to banks with regard to the issuing (and
terms of) bonds and funds to broaden the
availability of credit.
Credit quotas for
lending were abolished, and total bank lending
leapt to 29.8% of GDP in 2009 Q1 from 18.8% at the
end of 2008 Q3, and jumped again to 34.4% in Q2
(averaging at about 20% for the year).
Additionally, tax changes (reductions, but
more importantly, the conversion of value-added
tax from an investment-type to a
consumption-type), and subsidies were introduced
with small and
medium-sized, and
state-owned enterprises especially in mind. These
measures amounted to an opening of the credit
floodgates, and led to an overwhelming response
from the provinces.
By the end of 2008,
local governments accounted for almost 80% of
national expenditure. What was viewed as a crisis
in Beijing, was seen from the provinces as an
opportunity. [1]
The National Development
and Reform Commission (NDRC), the Chinese State
Council's (cabinet) supra-regulatory,
macroeconomic planning agency, was the body tasked
with overseeing the implementation of the program.
Ordinarily formulating investment policy,
and setting national priorities, the NDRC approves
applications from local governments (and central
ministries) that not only meet its priorities, but
can also provide matching funds (requiring, in
turn, proof of funding availability).
Since the central government proposed to
provide funding of only 1.18 trillion yuan for its
4 trillion yuan plan, the availability of
counter-funding was of crucial importance. While
the center approached the disbursement of funds
with urgency, it was also mindful of the
possibility that a given locality might not be
able to match its funding.
To address this
problem, the State Council introduced new measures
to help the localities meet co-financing
requirements (notably, a special 200 billion yuan
treasury bond issued on behalf of local
governments); endorsed the use of local government
financial platforms (or local investment
corporations) ; and loosened funding eligibility
requirements.
The immediate response from
local governments, central ministries, and the
financial sector was a deluge of investment
proposals, amounting to CNY 18 trillion in the
first month alone. The financial sector, where
decision making with regard to credit access had
become highly politicized, responded with similar
enthusiasm. Total fiscal and credit expansion
under the stimulus, as a percentage of GDP, rose
from 2% in 2008 to 19.3% in 2009, before falling
to a still considerable 5.9% in 2010.
In
December 2008, the Ministry of Human Resources and
Social Security implemented several measures to
ameliorate the employment situation, including the
temporary reduction of mandated social insurance
payments, and the provision of wage subsidies, and
retraining schemes. However, and predictably
enough, employment fell in early 2009 as the
effects of declining export revenues, and
decreasing rates of FDI began to be felt.
The quarterly ratio of vacancies to job
seekers, for example fell from approximately 0.98
in 2008 Q2 to 0.84 in Q4. While it seems clear,
after all, that government initiatives enjoyed
some success here, precisely assessing the
efficacy of the labor market programs introduced
at this time is problematic - not least for the
scarcity of information on the implementation of
these programs and important data such as
expenditures.
Conventionally, economic and
political reform are viewed as going hand in hand,
with democratization as the inevitable consequence
of marketization (understood as the rebalancing of
economic management away from the government, and
towards the market). The process of
decentralization is similarly viewed, but while
China is decentralized to a high degree, it also
remains notably authoritarian.
Premier Wen
Jiabao mentioned reform 70 times during his recent
speech at the NPC, and as he passes through the
final year of his premiership what actions he
takes to progress reform will be followed with
considerable interest internationally.
China was the first major economy to
emerge from the global financial crisis. However,
the price for this success was high, and much of
the progress that had been achieved over years in
terms of governance was reversed. While the
central government had also sought to protect
private enterprises, it was state-owned
enterprises that were the chief beneficiaries of
the stimulus programme; "the state advanced and
the people retreated".
Similarly, efforts
towards reorienting the national economy to the
domestic market, and to increasing domestic
consumption were arrested. In the financial
sector, longstanding efforts to clean up balance
sheets, and neutralize the long standing problem
of non-performing loans were drowned in the flood
of new credit after December 2008. Meanwhile, the
re-politicization of the credit approval process
undermined much of what had been achieved in terms
of the professionalizations of the financial
sector.
Local government, which the center
had heretofore sought to nudge towards the better
management of public budgeting and investment (not
to mention the provision of public services as
their primary responsibility and raison d'etre),
returned to the profligacy associated with
"socialist" soft budget constraints, with all the
risks of resource misallocation, inefficiency,
distortion, and rent seeking opportunity etc that
this entailed.
Finally, the ad hoc
empowerment of local investment corporations
(LICs), which had done so much to avert disaster
during the crisis, created a significant new actor
in the national economy, which now accounts for
around a fifth of all outstanding bank loans. The
LICs are mainly backed by land assets and
local-government guarantees, and act in a
regulatory vacuum, without oversight at the
national level. Further complexity and opacity,
and increasingly problematic governance, are a
further legacy of the stimulus to Chinese public
finances - with uncertain consequences.
Nevertheless, the stimulus package can (at
least, from this close remove) be regarded as a
success. Domestically, the stimulus provided
growth and employment (with renewed talk of labor
shortages, for instance), despite the collapse of
the export market upon which both were supposed to
depend; and further maintained that sacred cow of
Chinese politics, stability.
The Chinese
stimulus program was of great significance
internationally too, and may be likened in its
effect to that of China's response to the Asian
financial crisis 10 years earlier, securing
China's place as a leading country in the
international system, just as it had consolidated
China's position in the region a decade earlier.
Agreeing here, the World Bank identifies China as
playing a key role in global recovery:
If China had not implemented such a
strong fiscal stimulus package in 2009 and grown
as robustly as it did during the recent global
financial crisis, the global effects of the
Great Recession might have been even worse than
they were. In addition, China's outward foreign
investment is playing an increasingly important
development role in developing countries. [2]
As Beijing stands on the threshold of
"stimulus 2", with great and continuing
uncertainty in the international economy, a
careful appraisal of the rationale, costs and
benefits of the first stimulus programme is now
more timely than ever.
Notes: 1. Wong, Christine
(2011), "The Fiscal Stimulus Programme and Public
Governance Issues in China", OECD Journal on
Budgeting, 2011 (3), OECD Publishing. 2. The
World Bank and the Development Research Center of
the State Council, the People's Republic of China,
China 2030: "Building a Modern, Harmonious, and
Creative High-Income Society", (Washington: The
World Bank, 2012), p.60
Niall
Coen is reading for the MPhil/PhD East Asian
Studies at the University of Cambridge.
(Copyright 2012 Niall Coen)
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