Tag Archives: stimulus

China’s Stimulus Two Planners Have A Weaker Hand To Play

James Kynge, of the FT’s China Confidential, writing in the parent newspaper at the weekend, makes grim reading for any European or American policymaker hoping that a second Beijing stimulus would be able to pull the world economy though its latest sluggishness:

The sustained haemorrhage of state bank deposits has swelled the unregulated shadow banking system to such a size that it now supplies more credit to the economy each month than the formal banks do, according to China Confidential, a research service at the Financial Times. This means that Beijing, which has wielded financial control as a key tool of Communist party power, now finds itself largely at the mercy of an unregulated collection of trust companies, private banks, kerb lenders and loan sharks.

Even allowing that China’s trust banks, the largest part of the shadow banking system, are registered businesses and in hock to the big state owned banks — although that is a double-edged sword; which is tail and which is dog? — and there is some local-official sway over some local underground lenders, central economic policymakers are unlikely in the new circumstances in which then find themselves to be able to replicate the instant growth they stimulated with cheap state-driven credit in 2009.

A larger concern is that even if policymakers wanted to use the large state-owned banks to deploy Stimulus Two, the banks are in no shape bank to put it into effect. Beijing has already  moved to shore up the big banks’ balance sheets. Central Huijin, the domestic arm of the country’s sovereign wealth fund, started buying shares in the country’s four largest banks on Monday to “support [their] healthy operations” and “stabilise the share prices”.

Central Huijin is already the majority shareholder in the Industrial and Commercial Bank of China, China Construction Bank, Bank of China and Agricultural Bank of China. Investors have been increasingly jittery about the balance-sheet strength of the big state-owned banks, fearing they are carrying potentially too much bad debt from the loans made since 2008 in the cause of Stimulus One.

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China’s Economy in 2010: Steady And Uneasily As She Goes

This year’s Economic Work Conference, the annual top-level economic policy meeting, was as much about politics as economics, though that can be said most years. Creating socially stabilizing jobs was the focus, not that China is alone in that, and particularly rural jobs to absorb the migrant labor left jobless by the slump in the export manufacturing sector.

Few concrete policy details have emerged from the closed door meeting yet; they rarely do immediately but there was a broad commitment to keep the stimulus going in what will be the final year of the current five-year plan and last full year of the Hu-Wen leadership. Monetary policy will be kept loose, despite the central bank having being gently reining that in for some months. Fiscal policy will be “proactive”, which presumably means an extension of tax breaks that have been so beneficial to industries such as car making and to a lesser extent export manufacturers. In particular, more public money will be pumped into the countryside to raise demand there and thus the need for local jobs.

But as a sign of the fragility of the reaccelerating of growth seen this year, industries suffering from overcapacity will continue to see excess production capacity stripped out, under the guise of modernization and consolidation, much as we have been seeing with energy intensive and polluting industries over the past several years. New industrial investment will be kept “moderate”, according to Xinhua‘s post-meeting report.

If anything, industrial overcapacity is getting worse, especially in steel and cement making. That is not what should be being seen if recovery was on a solidly sustainable footing. And it goes to the heart of the problem China faces in growing its way out of a slowdown through investment spending, the central planner’s go-to policy response.

It is unsustainable and becomes an increasingly inefficient way to grow. Other countries might end up building bridges to nowhere, but in China state spending flows through state-controlled banks to state-owned enterprises and thus potentially deflationary industrial overcapacity.

Switching spending from investment to consumption, as we have noted before, is no easy task. Joblessness is one of the political costs of not being able to do so. Next year will see more expensive tending to the symptons and not enough curing of the underlying disease. Investors haven’t priced that into equities yet, but they will, possibly the hard way.

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China Expands Stealth Stimulus Package

This Bystander noted a couple of days back that there was a risk that the stimulus cash would run out before the underlying economy regained vigor–and that might mean the additional stimulus money Prime Minister Wen Jiabao says he has in his back pocket might be brought out. Now comes news, via Xinhua, that Beijing is expanding its subsidy program for the interior to the coastal cities.

The program applies to purchases of new cars and home appliances and is aimed at boosting domestic consumption, and by extension domestic employment. The target is to add 3m jobs in light engineering over the next three years. Beijing is allocating 5 billion yuan ($730 million) to the program for this year, up from the original 1 billion yuan, for the vehicles part, and 2 billion yuan for domestic appliances.

Stealth stimulus.

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Top-Up Stimulus On The Way?

This Bystander has noted before that the signs of revival in the economy are more to do with stimulus spending and pressed lending by state banks than a revival of trade and industry: exports in April were still down 22.6% from the same month a year earlier, energy usage, which correlates closely to industrial production, declined 3.5% year on year during the month and there is scant sign of factory excess capacity shrinking. Though retail sales were up 14.8% in April year-on-year, urban fixed asset investment during January to April was up 30.5% compared to the same first four months of 2008 as money poured into housing, railways and other infrastructure.

Equities are reflecting this, with the Shanghai Composite Index up by more than 45% this year. Indeed, more than reflecting it; the rise gives credence to those who say stimulus spending has been front loaded and we may already have got  through four fifths of the money earmarked for this year. The leveling off of bank lending in April would support that point of view.

If the funds run dry before global trade revives, the economy will slump again, and with it optimism that China can pull the global economy through this recession. We recall Prime Minister Wen Jiabao saying at the National People’s Congress in March that he had a top-up stimulus package sitting in his  back pocket should it be needed. We may be seeing it after all, and perhaps sooner rather than later.

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Cement Sales Rise

Another crocus: Anhui Conch Cement, the country’s biggest cement maker, says sales volume rose 15% in the first quarter. Its executive director Guo Jingbin, says he expects demand to keep rising in the second quarter as stimulus infrastructure spending on roads, ports and railways kicks in. Guo is expecting fixed-asset investment to grow 15-20% this year, and cement sales to rise to match.

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China’s Stimulus Package Helps GM

This Bystander always takes heart from stories of windfall successes for globalization. Bloomberg is reporting how Beijing’s efforts to stimulate domestic demand and spread growth into the countryside is helping the troubled U.S. auto giant, General Motors.

GM increased its sales of the minivans it makes in China with SAIC by 32% in the first two months of this year. This follows a cut in sales taxes on small vehicles and the introduction of 5 billion yuan in subsidies to auto sales in rural areas. Farm households which buy a first new minivan or light truck can get up to a 5,000 yuan subsidy, those replacing an existing vehicle can get up to 3,000 yuan.

GM has now upped its sales growth forecast for China to 5%-10% for this year, from 3%, not enough to offset the shrinkage of its home market, of course, but sufficient to have some American car industry executives to suggest China’s direct subsidies to car buyers should be replicated in the U.S.

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Wen Armed And Ready

The top-up stimulus that Prime Minister Wen Jiabao was expected to announce at the National People’s Congress but didn’t does exist, he says, but he is keeping it in his back pocket until and if needed. Nor will he say what’s in it, only that “we have reserved adequate ammunition…At any time, we can introduce new stimulus.”

Just the confirmation of its existence was enough to cheer equity investors. Not so bond investors, following Wen’s expression of concerns about the safety of its extensive holdings of U.S. Treasuries and other dollar-denominated debt. “We have made a huge amount of loans to the United States. Of course we are concerned about the safety of our assets. To be honest, I’m a little bit worried,” Wen said at a press conference following the NPC meeting. “I would like to call on the United States to honor its words, stay a credible nation and ensure the safety of Chinese assets.”

Take that as an admonition to Washington not to inflate its way out of recession by printing money. Of course, if Beijing did sell its U.S. debt on any large scale it would only self-defeatingly drive prices lower.

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Wen Provides Lots Of Familiar Numbers, But No New Stimulus One

A two-hour speech, as dry as tradition demands, but not a mention of the expected additional stimulus spending.

In his annual report to the National People’s Congress, Prime Minister Wen Jiabao ran through familiar economic themes and numbers:

it would be the most difficult year China has faced;

8% GDP growth was the target, raising domestic demand a goal, 9 million new jobs the aim;

the 22% increase in central government spending will go on infrastructure; local governments will largely finance a 23% rise in spending on education and of 38% in health care;

the budget deficit would be a  record 950 billion yuan, or 3% of GDP;

corruption would be rooted out and social unrest triggered by unemployment (9 million urban jobs would be lost) would be closely monitored:  “We will improve the early warning system for social stability to actively prevent and properly handle all types of mass incidents,” Wen said.

Perhaps the most telling line was that “As long as we adopt the right policies and appropriate measures and implement them effectively, we will be able to achieve [the 8% growth] target,” suggesting that the government feels its 4 trillion yuan November stimulus package is working, and that it doesn’t need to top it up, at least not at this point.

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Work Starts On New Chengdu-Lanzhou Railway

Work has started on a new high-speed rail line between Chengdu and Lanzhou. When completed in 2014/2015 it will cut travel time between the Sichuan and Gansu provincial capitals from 20 hours to four.

As well as being a shovel-ready infrastructure project to set free stimulus yuan–the line will cost 62 billion yuan ($9 billion), state media reports– the line is part of a grand plan to open up transport links to western China (and beyond), shipping Xinjiang’s oil, coal and cotton east and tourists in the opposite direction; the route will pass through the Minshan Mountains, home to giant pandas, and Jiuzhaigou and Gannan, both popular destinations.

China's Rail Network

China's Rail Network

Work is expected to start later this year on other new rail lines connecting to the Chengdu-Lanzhou railway, including Lanzhou-Chongqing, Baoji-Chengdu, Sichuan-Qinghai and Sichuan-Tibet. These complement the high-speed inter-city lines being built in the east.

Overall, China has earmarked 2 trillion yuan ($300 billion) of spending up to 2020 to improve its rail system, particularly for freight, expanding the network from 78,000 kms of track to 120,000 kms.

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Stimulus Ideas To Reject

So here’s a tapioca idea. Hangzhou local officials are to have 5%-10% of their wages paid in shopping coupons. These can be exchange for locally made goods. The coupons may also be given to the poor and the unemployed.

“We have not achieved any results yet,” Shou Xuejun, an official with a local financial bureau, told China Daily.

Quite.

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