Beijing’s stimulus plan criticised for worsening imbalance
Spending will cause over-investment and under-consumption, say economists
AFP 14 September 2009
(DALIAN, China) China’s widely praised stimulus plan has come under attack here at the ‘Summer Davos’ meeting from economists who say that the massive government spending is aggravating imbalances in the giant economy.
China said last Friday that it was on track to meet its target of 8 per cent economic growth this year - the rate that it says it needs to ward off social unrest - thanks largely to the massive programme of government cash handouts.
Beijing envisages four trillion yuan (S$838 billion) of investment over two years, including 1.18 trillion by the central government, mostly in infrastructure. But Xu Xiaonian of the China Europe International Business School in Shanghai said that the strategy supports structural imbalances - over-investment, surplus production capacity, and under-consumption - while neglecting long-term objectives.
‘China’s investment is already too strong. The US consumes too much but China consumes too little . . . Millions are poured into infrastructure . . . and distortion will continue to worsen,’ Prof Xu said at the third World Economic Forum in the north-eastern Chinese city of Dalian, which ended last Saturday.
Public investment accounts for nearly 45 per cent of China’s GDP, often benefitting industries already burdened with overcapacity, such as steel and cement, with consumption making up just 35 per cent.
‘China will lose steam and slow down. Eight per cent growth seems easy to get but will soon become a luxury.
‘Overcapacity is already a problem . . . and everybody will feel the pinch,’ said Prof Xu. ‘The recovery is not sustainable; the government is extending credit like crazy.’
Besides the huge governmental stimulus package, commercial banks also have been lending money this year on a massive scale. In the first half of the year, loans amounted to 7.37 trillion yuan, a line of credit that ‘is not sustainable’, said Stephen Roach, Asia chairman of Morgan Stanley.
The worry is not only that some of these loans are bad and might not be repaid, but also where the money is going - into the real economy or into stock or property speculation.
‘I would not call it recovery,’ said Prof Xu. ‘In Chinese, we have a saying about drinking poison to extinguish thirst. We need to say goodbye to past success and look for innovation.’
Analysts also said that China needs other drivers for economic recovery once the government cash injections run out.
‘We need to increase structural reform and reduce dependence on external demand,’ said Yu Yongding of China’s Academy of Social Sciences, a think tank.
Mr Roach agreed. ‘China needs more private consumption. Chinese households have a very high savings rate,’ he said, citing one estimate that put the rate at 37 per cent.
‘The missing link is the social safety network,’ he added. ‘The government has moved very slowly’ to provide support for the country’s sick and elderly, he said.
But in Dalian, Prime Minister Wen Jiabao rejected these criticisms, citing government initiatives including a trial retirement programme, spending on housing, health sector reform, and a massive three-year investment in the medical industry.
He said that by the end of June, the majority of government stimulus money was going into social programmes - including subsidised housing - with less than 20 per cent being spent on infrastructure.
‘We are not only thinking of how to meet the (8 per cent growth) target this year but also how to achieve long term economic growth,’ he added. -- AFP
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Beijing’s stimulus plan criticised for worsening imbalance
Spending will cause over-investment and under-consumption, say economists
AFP
14 September 2009
(DALIAN, China) China’s widely praised stimulus plan has come under attack here at the ‘Summer Davos’ meeting from economists who say that the massive government spending is aggravating imbalances in the giant economy.
China said last Friday that it was on track to meet its target of 8 per cent economic growth this year - the rate that it says it needs to ward off social unrest - thanks largely to the massive programme of government cash handouts.
Beijing envisages four trillion yuan (S$838 billion) of investment over two years, including 1.18 trillion by the central government, mostly in infrastructure. But Xu Xiaonian of the China Europe International Business School in Shanghai said that the strategy supports structural imbalances - over-investment, surplus production capacity, and under-consumption - while neglecting long-term objectives.
‘China’s investment is already too strong. The US consumes too much but China consumes too little . . . Millions are poured into infrastructure . . . and distortion will continue to worsen,’ Prof Xu said at the third World Economic Forum in the north-eastern Chinese city of Dalian, which ended last Saturday.
Public investment accounts for nearly 45 per cent of China’s GDP, often benefitting industries already burdened with overcapacity, such as steel and cement, with consumption making up just 35 per cent.
‘China will lose steam and slow down. Eight per cent growth seems easy to get but will soon become a luxury.
‘Overcapacity is already a problem . . . and everybody will feel the pinch,’ said Prof Xu. ‘The recovery is not sustainable; the government is extending credit like crazy.’
Besides the huge governmental stimulus package, commercial banks also have been lending money this year on a massive scale. In the first half of the year, loans amounted to 7.37 trillion yuan, a line of credit that ‘is not sustainable’, said Stephen Roach, Asia chairman of Morgan Stanley.
The worry is not only that some of these loans are bad and might not be repaid, but also where the money is going - into the real economy or into stock or property speculation.
‘I would not call it recovery,’ said Prof Xu. ‘In Chinese, we have a saying about drinking poison to extinguish thirst. We need to say goodbye to past success and look for innovation.’
Analysts also said that China needs other drivers for economic recovery once the government cash injections run out.
‘We need to increase structural reform and reduce dependence on external demand,’ said Yu Yongding of China’s Academy of Social Sciences, a think tank.
Mr Roach agreed. ‘China needs more private consumption. Chinese households have a very high savings rate,’ he said, citing one estimate that put the rate at 37 per cent.
‘The missing link is the social safety network,’ he added. ‘The government has moved very slowly’ to provide support for the country’s sick and elderly, he said.
But in Dalian, Prime Minister Wen Jiabao rejected these criticisms, citing government initiatives including a trial retirement programme, spending on housing, health sector reform, and a massive three-year investment in the medical industry.
He said that by the end of June, the majority of government stimulus money was going into social programmes - including subsidised housing - with less than 20 per cent being spent on infrastructure.
‘We are not only thinking of how to meet the (8 per cent growth) target this year but also how to achieve long term economic growth,’ he added. -- AFP
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