The $590 billion economic stimulus package is by far the most successful move in raising China’s international image. The Publicity Department in Beijing deserves a big pat on the shoulders for a job well done. Hu Jintao spares no time in capitalising on this success, as can be seen from his recent attempt to build closer ties with some resources rich South American countries.
As the rest of the world is joining Mr Kevin Rudd, the Australian Prime Minister, in congratulating China for an “extraordinary” fiscal stimulus package and in its effort “to take a leading role in solving the global financial crisis”, some analysts are starting to ask more fundamental questions about the nature of this package: In what way is China vulnerable to the current global financial crisis? Will the amount of money be sufficient to solve the problems? How will the money be spent? Who is getting the money? And finally and ultimately, can the stimulus package ensure that the world’s fastest-growing economy avoids a sharp downturn?
So far the assessments are not optimistic.
In analysing the challenges ahead of China, George Wehrfritz of Newsweek says:
Today, China is the lead exporter, the world again faces massive overproduction, and the mistake Beijing must avoid is moving too hard to sell more manufactured exports at the risk of flooding an already weak market, and triggering a protectionist backlash. That will only push the global market toward deflation-the downward spiral of falling prices leading to falling demand, as stressed consumers wait for even better bargains.
An initial analysis seems to indicate that the package makes some vague promises in promoting household consumption through boosting housing, health care and education. However, analysts also point out that social welfare expenditure of this kind is not likely going to gain support among China’s political elites. The overwhelming chunk of the package will instead be devoted to infrastructure upgrades and in boosting export sales.
That is why Wehrfritz warns:
Export promotion offers a viable short-term means of keeping the factories of China running-yet grabbing more market share amid a global downturn is the surest way to incite protectionism.
The picture is even less promising when we look further into the problem of infrastructure spending. Victor Shih discusses the enormous hurdle in overcoming corruption when Beijing distributes money to the local governments for infrastructure upgrades:
… at this point, local governments are desperate to get this part (of money from the Central Government). Thus, a massive fraud whose working and purpose are perfectly clear to all the players involved is perpetrated. Basically, local governments propose projects which may or may not be implemented with the sole purpose of receiving central funding and “supplementary” (peitao) bank loans from the state banks in order to stave off the bankruptcy of local SOE groups, which are heavily indebted at this point.
In other words, many provincial level state-owned enterprises in China are facing bankruptcies. They will use the stimulus package to bail themselves out of debt. This use of money from the package serves to prevent (or in some cases to delay) the bankruptcies of SOEs and to reduce unemployment. Like the US bailout, however, the Chinese bailout only buys time. Given that many state-owned businesses have speculated heavily on the real estate market, it is quite possible that more bailouts will be needed in the near future.
Many world leaders will be disappointed if they are counting on the stimulus package to transform China into a consumers’ paradise. If the analysis I am quoting here are not too far off target, we may have to count our blessings and pray that the Chinese economy is not grinding to a halt next year.