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Doubts raised over China’s stimulus plans
Investors paying attention to Chinese government pronouncements could be forgiven for thinking the world’s second-largest economy has already embarked on an enormous stimulus programme to boost rapidly cooling growth.
This week alone, the Chinese megacities of Tianjin and Chongqing each unveiled plans for investments of Rmb1.5tn ($236bn) in large industries such as petrochemicals, automobiles, electronics and advanced equipment over the next few
The central government also chimed in, announcing a plan on Tuesday involving Rmb2.4tn of investment in energy conservation and carbon emissions reduction by 2015.
There have been a dozen other smaller investment packages disclosed by local governments in the last couple of weeks, but these three initiatives alone, if taken at face value, would already dwarf the Rmb4tn economic stimulus package Beijing launched in November 2008 at the height of the global financial crisis.
So why are independent analysts and economists so dismissive of suggestions the country is poised for another explosion in infrastructure spending like that seen in 2009 and 2010?
For a start, the administrations of Chongqing, Tianjin and a host of smaller cities are being more than a little disingenuous when they talk about their intention to invest trillions of renminbi in strategic industries.
According to analysts, officials and economists familiar with the plans, the extraordinary figures tripping off the tongues of provincial mandarins are very ambitious projections of the investment they hope to attract from foreign, state and private enterprises, as well as the central government.
They are certainly not an indication of how much local governments themselves plan to spend in the next few years.
“You can’t take these headline figures seriously because they’re all inflated by local governments who are competing with each other to announce the biggest number and to attract foreign and central government investment,” said Zhang Zhiwei, chief China economist at Nomura.
In fact, provincial and regional governments hoping to boost growth in their regions are facing diminished financial resources and already very high levels of debt left over from the last round of stimulus launched in 2008.
On Wednesday, a top government adviser expressed concern over the huge investment plans and the fact that the burden of stimulating the economy has so far fallen on local governments.
Li Yang, vice-president of the Chinese Academy of Social Sciences, one of China’s top state think-tanks, said: “Where will the money come from? Right now, it’s all in a disorderly state.”
In recent years local governments in China have come to rely on land sales to commercial property developers for a large chunk of their revenue.
But thanks in large part to government efforts to curb surging real estate prices, land sales across the country were down by almost a quarter in the first seven months of the year from the same period last year.
Adding to the hit from sluggish land sales, corporate tax receipts are slumping as a result of much poorer profits at many companies as well as Beijing’s move to cancel some taxes to help boost growth.
Very large state enterprises pay the bulk of their taxes to the central government so local governments often rely on taxes from smaller enterprises, many of which are in the export business.
On Thursday, a flash purchasing manager’s index published by HSBC showed export orders shrinking this month at their fastest pace since the first quarter of 2009, the very peak of the global financial crisis.
The overall flash PMI reading of 47.8, down from 49.3 in July, provided further proof that the Chinese economy was deteriorating.
But perhaps the biggest obstacle to a major economic stimulus led by the provinces is the deep indebtedness of many regional governments.
In order to pay for the last round of stimulus, most regional administrations set up investment vehicles to get around restrictions that forbid local governments from accessing credit markets directly.
These local government investment vehicles borrowed more than Rmb10tn from the state-owned banking sector and poured it into roads, apartment blocks, parks and other infrastructure, much of which was uneconomic and will not provide enough return to repay the original loans.
This time round, attempts by local governments to dazzle investors and shore up confidence by announcing enormous investment plans are starting to have the opposite effect.
Yu Song, an economist at Goldman Sachs, said: “We remain cautious on the short-term macro outlook as it is not clear when and how many domestic demand-related loosening policies will be rolled out and, when they are rolled out, whether they will be sufficient to offset the weakening forces in exports and tightening in the property market.”
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