Turn off the money pump
Any attempts by Beijing to dust off infrastructure projects unfinished after the last stimulus package in a bid to revive a slumping economy could do more harm than good, potentially causing a property bubble and a blowout in local government spending, independent economist Andy Xie Guozhong warns.
'It's inevitable that China's economic growth had to slow after the government created such a huge bubble over the previous five years,' Xie said in an interview with the South China Morning Post at the Asian Investment Summit in Hong Kong yesterday. He said it was unfortunate that any attempts by Beijing to retune the economy coincided with a sharp slowdown in export growth because of the euro-zone sovereign debt crisis.
The correct thing to do was to restructure, let companies fail, accept the pain and move on to a more sustainable economic model, Xie said.
Economists and policymakers are at loggerheads over how to stimulate China's economy as its growth slows more quickly than most expected. Over the past month, industrial-production growth decreased, electricity output remained flat, and fixed-asset investment growth fell to its lowest level in years.
As a result, Beijing appears to be reopening and fast-tracking infrastructure projects that had been mothballed.
More than 100 projects, mainly in the clean-energy sector, have been approved within the past three days, according to the National Development and Reform Commission (NDRC). This coincided with an increase in government land sales.
The worrying signs of a slowdown just when the rest of the world is hoping that China will power global growth have prompted Premier Wen Jiabao to say that 'the magnitude of policy fine-tuning should be increased according to the latest situation', with an emphasis on stable growth.
Chen Dongqi, vice-director of the academy of macroeconomic research under the NDRC, was quoted by Caijing magazine as saying China needed to make policy changes as soon as next month to boost the economy.
Falling back on infrastructure construction could help China over the short term, said Yao Wei, China economist at Societe Generale. 'But the key is: can China control and cease such stimulus before it gets out of hand?'
During the 4 trillion yuan (HK$4.88 trillion) stimulus package launched during the global financial crisis, banks ended up lending a total of 18 trillion yuan between 2009 and 2010.
Freya Beamish, an economist at Lombard Street Research, also frets that an investment-led stimulus package would do more harm than good.
Liquidity trouble would uncover the solvency issues that had been lurking in the banking system for years, she wrote in a report. She said pumping money into the system could merely end up adding to capital outflows in search of higher yields, and could also fuel inflation.
'This in turn could well knock the air out of enterprise, and particularly state-owned enterprise, that has been reliant on an easy supply of credit with little concern for future cash flow,' she wrote in a report.
'It is in this sense that the knee-jerk stimulus would be self-defeating. It may provide a short-term boost to the equity market but the emphasis is on short term. The timing of China's slowdown comes at a sensitive time internally. The country is going through the biggest leadership reshuffle in nearly a decade.'
Xie, who accurately predicted the bubbles that led to the Asian financial crisis in the late 1990s and the US subprime financial crisis, is not optimistic. He thinks the chances of true reform in China are slim, because of powerful vested interests, who would fight any attempts to make real changes.
'China is actually putting the problem off,' said Xie, adding that it was harder for governments to stall vital reforms now that information was readily available, making it difficult for government to hide things from the public.
The deal-breaker for social stability was inflation, said Xie, who argues that China's real inflation is much higher than the official figures supplied by the National Bureau of Statistics. Inflation also led to social turmoil in 1989.
'A series of recent upheavals, mostly related to land grievances, shows that people are increasingly less fearful of the government,' Xie said.
In 2010 alone there were more than 187,000 mass 'incidents', more than 500 a day, according to Gao Yu, a director at the Landesa Rural Development Institute, adding that local government reliance on land sales for revenue means that land grabs are a rising cause of instability.
To solve the country's fundamental problems, Beijing needed to limit government spending and make it more transparent, Xie said. And it needed to stop extending cheap credit to state-owned enterprises, which were much more inefficient than private-sector competitors.
Beijing also needed to cut taxes and boost consumption by improving people's spending power, he added.
If it acted soon, China could still have a chance to sustain its economic growth and become the world's largest economy in 10 years, Xie said.
'What can't be changed, however, is the distortion of a generation's values - in which people believe the end justifies the means and corruption equals competence.'