assessments

May 22, 2009 | 14:35 GMT

4 mins read

China: Problems With the Stimulus Plan

FENG LI/Getty Images
Summary
The Chinese government announced May 22 that one-quarter of the $586 billion stimulus package will be spent helping the province of Sichuan recover from the May 12, 2008 earthquake. The "stimulus" package's already dubious fundamentals just got weaker.
China's National Development and Reform Commission, in essence the Politburo's economic arm, announced May 22 that fully one-fourth of the $586 billion stimulus package will be spent on earthquake relief in the province of Sichuan. Despite the media — both in China and elsewhere — obsession with the "unprecedented" and "massive" size of the Chinese stimulus package, STRATFOR has not been particularly impressed to date. STRATFOR's take on the package has been thus:
  1. This is not a stimulus program designed to restart the economy in the short run. Good stimulus packages are very front-loaded so that they can shock the system with immediate demand. China's plan is in actuality a five-year plan designed to help develop the country's poor interior provinces largely by building infrastructure.
  2. It is not actually $586 billion in cash. Only $146 billion — about one-fourth — of the program will be funded by the national government, and this will take the form of construction bonds. The remaining $440 billion will be up to the regional governments to raise. This will be a neat trick since until very recently — and by this we mean that the idea was only even floated in March — regional governments had no authority (much less experience) in issuing their own bonds.
  3. The Chinese government is not particularly convinced that the package will work. If Beijing were convinced, it would be tapping at least some of its roughly $2 trillion in currency reserves (its own money), rather than going through the more drawn-out process of dozens of bond issuances (getting access to other people's money).
But, for STRATFOR, the new announcement about Sichuan really takes the cake. It isn't that Sichuan does not need the help. The earthquake there was devastating, the mismanagement of the recovery has been in the same situation as New Orleans in the early post-Katrina days, and the place is a hotbed of problems that the Chinese government desperately wants to contain. Sichuan has become a microcosm of China's problems, Han Chinese migrants being forced to return from the richer coastal provinces as work dries up. Tibetan and Uighur minorities who came to Sichuan to seek work being sent home for the same reason. And China's remarkably unsteady banks become more unsteady farther inland. But putting $150 billion in the stimulus package to a single region not only strikes us as a bit of a stretch, but as a warning of just how bad things have gotten in Sichuan in recent weeks. The earthquake, after all, happened May 12 of 2008. The bottom line is that almost none of the official stimulus package is actually going to help China's industry, faltering as it is due to lack of export orders. China's vector for that effort originates not in direct government spending, but in loans from the various state banks. From January to April, Chinese bank loans exploded to more than triple their already high rates. Nearly $1 trillion was lended during that period — more than in all of 2008 — in order to force-feed the capital necessary into the system to keep China's legions of factories from releasing armies of unemployed citizens. But a policy shift that sudden and holistic cannot be done with much oversight — and it wasn't. China is more concerned about maintaining employment than about ensuring that money is used efficiently. And the result of such a sudden surge in loan-granting will inevitably be a mounting of nonperforming loans that will eat at the very heart of the Chinese financial system (a similar problem is what brought down Japan in 1991). And that is the good news. Much of this loan surge — by some reports, perhaps as much as half — is being lost to scams, corruption and simply using the money to play the various Chinese stock markets. The Shanghai Composite Index, for example, is up 50 percent since its lows in November 2008 — an otherwise inexplicable development considering the steady stream of bad economic news that has trickled out of Beijing in recent months.

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