WHAT IS SIGNIFICANT to this Bystander’s eye about the mini-stimulus package that China has just announced is that it is to be financed by central government bonds. That has two implications. The first is that the spending will be targeted to specific projects. When Beijing announced its 2008 stimulus it in effect set an overall goal and left it to provincial and municipal governments to fill in the details. That scattershot approach had several unintended consequences. One was a raft of what have turned out to be uneconomic investments in infrastructure and a credit boom that has left a large and ticking local-government debt bomb. Another was a further round of mutually enriching deals between local government officials and developers involving unpopular land requisition. This time more reliance will be put on the discipline of the debt markets to keep both borrowing and corruption in check.
Second, as well as keeping the loan books of the banks swelling further at a time when their bad debt write-offs are rising, it will also provide a boost to the development of the onshore bond market. China will issue at least 150 billion yuan ($24 billion) of bonds this year to finance railway construction in the less developed central and western provinces of the country, part of a $300 billion yuan railway investment fund that will be open to outside investors. It also plans to issue 1 trillion yuan-worth of bonds over an unspecified period through the state-owned China Development Bank to build affordable housing.
Both initiatives will bring forward already planned work in order to ensure the economy stays within touching distance of its official target of 7.5% growth this year — ever more frequently described by officials as “about 7.5%” growth. They will also help generate the 10 million new jobs top policymakers deem necessary to ensure social stability. Those jobs will mostly be in poorer parts of the country and are intended to help reverse growing income inequality. This is stimulus that has political goals as much as economic ones.