OECD warns Beijing on infrastructure spending

PUBLISHED : Wednesday, 18 November, 1998, 12:00am
UPDATED : Wednesday, 18 November, 1998, 12:00am

The Organisation for Economic Co-operation and Development (OECD) has heavily criticised Beijing's economic policies and warned that they could inflict long-term damage on the economy.

In today's release of the preliminary edition of its biannual Economic Outlook, the OECD said Beijing's decision to speed up infrastructure spending at the expense of fundamental reforms could exacerbate weaknesses in the economy.

'The current temporary pause in the reform process reflects the authorities' concerns that mounting unemployment pressures and other dislocations could become a serious problem, particularly given the uneven geographical distribution of income and employment opportunities,' the OECD said.

'However, there are risks that substituting fiscal stimulus for reforms, even in the near term, could exacerbate the more fundamental problems.' In the past few months, Beijing has postponed privatisation of small and medium-sized state enterprises and put on hold reforms aimed at encouraging home ownership.

Instead, it has accelerated a massive infrastructure spending programme by announcing the planned launch of 100 billion yuan (about HK$93 billion) in government bonds, and encouraged lending by the big four mainland banks.

However, the OECD warned that any additional government spending or tax increases were limited by the already large central government deficit.

Any fiscal boost would be further constrained by the outlays needed for financial sector and enterprise reforms, and the eventual need to take back on to the government budget the social burdens Beijing is trying to relieve state enterprises of, it said.

An acceleration of the infrastructure-spending programme also could prove counter-productive.

'While China's infrastructure needs will require massive expenditures over the longer-term, the experience of other countries indicates that accelerating such spending in the near term can result in inefficient projects that simply waste scarce resources.' By increasing lending to inefficient state enterprises, overcapacity, excess inventories and non-performing loans at state enterprises could worsen. Such lending could also divert resources from more efficient sectors.

The OECD said Beijing urgently needed to restore financial solvency to the banking system and state enterprises, to attract greater levels of foreign investment.

'While China has weathered the regional crisis quite well, the financial crisis of . . . Asian countries which shared similar structural problems with China has raised concerns that its current strains could develop into something considerably worse.' It said banking and enterprise reform were vital so the mainland could lower its national trade barriers, even cut the income disparities between provinces, and continue with social welfare reforms at an acceptable cost.

The OECD predicted mainland gross domestic product growth would slow from 8.8 per cent last year to 7.6 per cent this year, and rise only slightly to 7.7 per cent next year, before falling back to 7.2 per cent in 2000.

For Hong Kong, the OECD sees a significant downturn, slashing its June estimate of 0.9 per cent for 1998 GDP to minus 4.5 per cent this year. It sees only a slight recovery of 1.5 per cent next year, before the economy stages a rebound in 2000 to 5.5 per cent.

The quick turnaround expected in 2000 in Hong Kong was partially attributable to the highly capitalised nature of SAR banks, and the stronger regulatory environment.

'For these reasons, the credit crunches now evident should ease with lower interest rates, and as activity begins to recover,' the OECD said.

'Financial strains experienced by banks and corporations may well damp the initial stages of the recovery, as they did in the United States and several other OECD countries during the early 1990s.

'However, provided there are no further outside shocks that make them substantially worse, the financial problems are unlikely to prevent a recovery, and any public outlays needed for a financial restructuring should remain moderate.'