Geopolitical Diary: Questions About China's Stimulus Plan

News from China stole the stage (everywhere outside the United States, anyway) from U.S. President-elect Barack Obama on Monday, with Beijing announcing a $570 billion stimulus package to counteract the local impact of the global economic downturn. Stock markets in Asia and Europe, along with most commodity markets, bubbled in reaction. As the theory of the uptick goes, China is the world's third- or fourth-largest economy, depending on whose numbers you use, and its nearly $2 trillion in currency reserves makes it one of the few states to have much room to maneuver in the current economic crisis. The specific problem that China faces is not a liquidity crunch (as in the United States) or banking crisis (as in Europe), but rather the enervation of its exports — most of which are sold to a now recessionary West. Fewer exports means fewer factory runs, which could quickly translate into multitudes of unemployed Chinese willing to take long walks in big groups. The question on the Chinese Politburo's collective mind is how to ensure that social stability does not fray when the fundamentals of the quintessential Asian export economy go straight to hell. The proposed solution goes something like this: Develop the inland provinces and thus create internal demand for the country's "exports." Most of China's wealth is generated by and held in its port cities, all of which grew to prominence during the export-led development binge of the past 30 years. But much of the population is not clustered around these coastal provinces; it is located further inland, where people live on the wrong side of sizable income, education, employment and quality of life gaps. On the surface, it seems the new program has a middling chance of succeeding simply because it will be backed up by $570 billion — nearly 20 percent of China's gross domestic product (GDP). Yet at second glance it is not clear how much money is really on offer. The $570 billion includes funds precommitted for other programs, and a large chunk that local governments will be expected to somehow stump for themselves. And there is also the issue of how quickly the money will be made available. Details are sketchy here too, but it appears that the money will be spent over a period of two to as many as five years. Taken together, the package suddenly looks a lot less impressive, having shrunk from the originally reported 15-20 percent of GDP in one year (the biggest stimulus package in human history) to a sum with "new money" perhaps amounting to less than 1 percent of GDP per year for the next five — a "stimulus" that most countries would just consider part of their normal budgets. Which leaves us with two questions. First, why is the national government not simply using its currency reserves to pay for the program itself? Most likely, this is because Beijing realizes that much of the vastly poor and corrupt inland would require far too much aid to ever become developed by any reasonable standards. Turning the poorest parts of an overpopulated country into something rich enough to potentially replace Paris and New York on your customer list is not something that can happen quickly or cheaply, and Beijing cannot be itching to send good money into China's undeveloped areas. Second, if the national government is not bellying up to the bar for this plan, then who will? Based on China's record, it seems the interior provinces are most likely to be forced to pay up to three-quarters of the bill, mainly by taking out loans under the much looser monetary policy that Beijing is offering. In terms of relative size, this could well be like Washington directing the 50 states to double the outlays of their budgets for four years without compensation. The provinces will approve of taking on so much debt only if they are freed to lavish their borrowed wealth on pet projects of their own. And that would not be a coherent economic policy at all.