The Chinese government’s ambitious economic stimulus program looks great on paper. But it’s problematic backstage.
Shen Minggao and Wang Jing, Caijing 25 December 2008
How big is the Chinese government’s economic stimulus package?
The central government has described it as a 4 trillion yuan shot in the arm. But local governments, banks and private investors are being expected to provide all but a 1.18 trillion yuan injection from the central treasury. In that sense, the figure 4 trillion is more conceptual than numerical.
The actual size of the stimulus package will depend on how much additional funding the central government can invoke to supplement its 1.18 trillion yuan.
No need to worry about whether local governments will respond to the initiative. They’ve always been keen on investment, since it’s relatively easy to boost local GDP by launching investment projects. That’s why as soon as the stimulus plan was announced November 9, local government officials and project managers crowded the Beijing headquarters of the National Development and Reform Commission (NDRC), China’s central economic planner, in a scramble for funds.
Since then, local governments have been racing to complete investment plans. Data collected by Caijing shows that, by mid-December, 18 provinces and cities ranging from wealthy coastal regions such as Guangdong and Shanghai to less advanced Henan and Yunnan, have unveiled investment plans worth more than 25 trillion yuan.
But like their central government counterparts, local officials are counting on others to supplement their stimulus contributions. Locals expect to get 5 yuan from outside sources for every yuan they contribute to specific projects.
So if governments in the 16 regions that had not reported their investment plans by mid-December follow the example of the first 18, local government initiatives will spark a total investment of 31 trillion yuan nationwide over the next two years – nearly eight times the central government’s original plan. And that’s a conservative estimate.
The aggressiveness displayed by these 18 governments is breathtaking. Most of their plans call for doubling 2007 investments. Given that investments account for about 40 percent of the nation’s GDP, these incremental local investments would bolster economic growth by more than 16 percentage points.
So why is China worrying about an economic slowdown? Well, although local governments are showing marvellous ambition, financial realities have cast a shadow over their promises.
For one thing, the plans fail to differentiate between investments in new and existing projects. Moreover, local governments may be overconfident about the amount of the private investment they can attract. Their estimated ratio of additional investment to government spending of more than 1 to 5 dwarfs the central government’s projection of 1 to 3. And even the best plans can fade quickly if firms and investors turn bearish.
A critical question remains: How will local governments finance these initiatives?
Regardless of their supersized promises, local governments must raise 1.12 trillion yuan to complement the central government’s 1.18 trillion yuan by the end of 2010. Current fiscal conditions, however, suggest they can only afford about half that amount, or 620 billion yuan.
Local governments are not allowed to raise money by issuing bonds. Their funding sources are limited to areas such as land sales, bank loans and cash transfers from the central government. They also have the right to negotiate delayed payments to government contractors. None is a sure bet for meeting stimulus package goals.
Land sales – traditionally a major source of local revenues – have fallen sharply as the real estate sector slumps after peaking in 2007. Conditions are not expected to improve until the overall economy brightens.
On the other hand, bank loans may become a major financing source in coming years. Local governments enjoy significant influence over bank decision-making. The so-called “government-bank cooperation” mode has long been promoted as a way to guarantee financing for major public construction projects.
Some contractors hoping to win stimulus-related contracts might accept longer payment periods from local governments that owe them money. One drawback, however, is that new “arrear payments,” or delayed payments, terms could hurt liquidity and magnify risks for companies.
Meanwhile, the central government plans to issue 500 billion yuan worth of treasury bonds in 2009. So far, there has been no hint that Beijing plans to use the proceeds of treasury bill to foot local government’s spending schemes.
Few doubt the determination of central and local government to boost the economy. But good intentions are not necessarily enough to revive market confidence.
Keeping China’s annual growth rate above an 8 percent target for the next two years does not necessarily mean investors will be convinced of the nation’s prospects for sustainable, long-term growth. To win confidence, governments will have to avoid overbuilding production capacity, aggravating the nation’s environmental vulnerability and making big promises they can’t keep.
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Economic Stimulus: Easier Said than Done
The Chinese government’s ambitious economic stimulus program looks great on paper. But it’s problematic backstage.
Shen Minggao and Wang Jing, Caijing
25 December 2008
How big is the Chinese government’s economic stimulus package?
The central government has described it as a 4 trillion yuan shot in the arm. But local governments, banks and private investors are being expected to provide all but a 1.18 trillion yuan injection from the central treasury. In that sense, the figure 4 trillion is more conceptual than numerical.
The actual size of the stimulus package will depend on how much additional funding the central government can invoke to supplement its 1.18 trillion yuan.
No need to worry about whether local governments will respond to the initiative. They’ve always been keen on investment, since it’s relatively easy to boost local GDP by launching investment projects. That’s why as soon as the stimulus plan was announced November 9, local government officials and project managers crowded the Beijing headquarters of the National Development and Reform Commission (NDRC), China’s central economic planner, in a scramble for funds.
Since then, local governments have been racing to complete investment plans. Data collected by Caijing shows that, by mid-December, 18 provinces and cities ranging from wealthy coastal regions such as Guangdong and Shanghai to less advanced Henan and Yunnan, have unveiled investment plans worth more than 25 trillion yuan.
But like their central government counterparts, local officials are counting on others to supplement their stimulus contributions. Locals expect to get 5 yuan from outside sources for every yuan they contribute to specific projects.
So if governments in the 16 regions that had not reported their investment plans by mid-December follow the example of the first 18, local government initiatives will spark a total investment of 31 trillion yuan nationwide over the next two years – nearly eight times the central government’s original plan. And that’s a conservative estimate.
The aggressiveness displayed by these 18 governments is breathtaking. Most of their plans call for doubling 2007 investments. Given that investments account for about 40 percent of the nation’s GDP, these incremental local investments would bolster economic growth by more than 16 percentage points.
So why is China worrying about an economic slowdown? Well, although local governments are showing marvellous ambition, financial realities have cast a shadow over their promises.
For one thing, the plans fail to differentiate between investments in new and existing projects. Moreover, local governments may be overconfident about the amount of the private investment they can attract. Their estimated ratio of additional investment to government spending of more than 1 to 5 dwarfs the central government’s projection of 1 to 3. And even the best plans can fade quickly if firms and investors turn bearish.
A critical question remains: How will local governments finance these initiatives?
Regardless of their supersized promises, local governments must raise 1.12 trillion yuan to complement the central government’s 1.18 trillion yuan by the end of 2010. Current fiscal conditions, however, suggest they can only afford about half that amount, or 620 billion yuan.
Local governments are not allowed to raise money by issuing bonds. Their funding sources are limited to areas such as land sales, bank loans and cash transfers from the central government. They also have the right to negotiate delayed payments to government contractors. None is a sure bet for meeting stimulus package goals.
Land sales – traditionally a major source of local revenues – have fallen sharply as the real estate sector slumps after peaking in 2007. Conditions are not expected to improve until the overall economy brightens.
On the other hand, bank loans may become a major financing source in coming years. Local governments enjoy significant influence over bank decision-making. The so-called “government-bank cooperation” mode has long been promoted as a way to guarantee financing for major public construction projects.
Some contractors hoping to win stimulus-related contracts might accept longer payment periods from local governments that owe them money. One drawback, however, is that new “arrear payments,” or delayed payments, terms could hurt liquidity and magnify risks for companies.
Meanwhile, the central government plans to issue 500 billion yuan worth of treasury bonds in 2009. So far, there has been no hint that Beijing plans to use the proceeds of treasury bill to foot local government’s spending schemes.
Few doubt the determination of central and local government to boost the economy. But good intentions are not necessarily enough to revive market confidence.
Keeping China’s annual growth rate above an 8 percent target for the next two years does not necessarily mean investors will be convinced of the nation’s prospects for sustainable, long-term growth. To win confidence, governments will have to avoid overbuilding production capacity, aggravating the nation’s environmental vulnerability and making big promises they can’t keep.
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