Project 211

Infrastructure spending spree, price reforms urged

PUBLISHED : Friday, 31 October, 2008, 12:00am
UPDATED : Friday, 31 October, 2008, 12:00am

The mainland should roll out a 'New Deal'-style programme of infrastructure spending in response to the global financial crisis, but domestic economic pain is likely to be compounded by the pricing policy missteps of recent years, a panel of experts said yesterday.

'For China, this is a chance to do what it could not do in the past, when massive infrastructure spending was needed but it was unable to [carry this out] because of rising oil and materials prices,' said Xiao Geng, the director of the Brookings-Tsinghua Centre for Public Policy in Beijing.

'All policy [responses] put on the table to date are negligible and amount to less than 1 per cent of [gross domestic product] ... This is really the time for China to think about the kind of package the US put together during the New Deal,' Mr Xiao said yesterday at a conference organised by the South China Morning Post and the faculty of business and economics at the University of Hong Kong.

While panellists agreed that infrastructure spending would likely help prop up the mainland economy, views differed over the quality of growth that would result and the depth of the impact that would come from the global credit crisis.

A number of 'policy missteps' in recent years were likely to compound the effects of the slowdown, Citi Asia-Pacific managing director and head of China country research Xue Lan said.

'China overgrew its potential in the last few years,' Ms Xue said, citing mis-pricing of energy and utilities by state economic planners.

Chew Ping, Standard & Poor's managing director and head of Greater China, said pricing reform was also a key imperative for the development of the mainland's financial industry.

'Prices still have some way to go to reflect true costs,' he said. 'Can banks charge correctly on loans? They must charge according to policy but does this accurately price in risk?'

Mr Xiao agreed that 'prices for capital were not adequately set' and said this was to blame for the mainland's stock and property market bubbles that were now in the process of deflating.