A 4 trillion yuan splash, but a lot less 'real water'

PUBLISHED : Tuesday, 11 November, 2008, 12:00am
UPDATED : Tuesday, 11 November, 2008, 12:00am

You have to hand it to the mainland's leaders; they certainly made a splash with the announcement on Sunday of their 4trillion yuan (HK$4.54 trillion) economic stimulus package.

The headline sum is truly enormous. To put it into perspective, 4 trillion yuan is equivalent to 16 per cent of the country's entire economic output last year. Or, to look at it another way, that's enough money to build nine South-North River projects, to fund the Beijing Olympics 14 times over, or to build 20 Three Gorges Dam projects.

It is also four times the size of the US$150 billion round of tax cuts rolled out at the beginning of this year by President George Bush in an attempt to stimulate the United States' far larger economy.

Certainly, investors were delighted with the size of the package, bidding stock markets in Asia and Europe sharply higher in response to the news.

Their euphoria may prove short-lived. Although the headline sum is huge, there is considerable doubt about how much of it consists of what analysts examining Japan's supplementary budgets of the late 1990s used to call 'real water', or genuinely new government spending.

According to Sunday's announcement, the 4trillion yuan will be doled out between now and the end of 2010 over 10 different fields.

A closer look at the proposed spending plans and tax cuts, however, indicates the headline amount is likely to include considerable sums already earmarked for existing programmes that would have proceeded anyway.

Although there was little detail to go on, it appeared the 4 trillion yuan included at least some of the 1 trillion yuan allocated for reconstruction following the Sichuan earthquake, as well as a portion of the 2 trillion yuan budgeted for investment in railways between 2006 and 2010. It also included 120 billion yuan a year of corporate value-added tax cuts that have been in the pipeline for months and come into effect next year.

Knock off these and other pre-existing measures and the headline 4 trillion yuan begins to look more like 2.3 trillion or less.

That is still a lot of money, and certainly enough to have a considerable stimulative effect if spent in full. However, there are big questions over how the package is to be financed.

Many economists believe funding will be no problem, pointing out that Beijing ran a budget surplus last year and that, at 25 per cent, the country's government debt to GDP ratio remains low by international standards.

But the mainland's fiscal position is less strong than it appears at first. Last year's budget surplus was a one-off at the peak of the economic cycle (see the first chart below) and will not be repeated any time soon. As the downturn has begun to squeeze in recent months, government revenue growth has plunged even as spending has climbed (see the second chart).

What's more, some analysts doubt the accuracy of the government debt to GDP figure, arguing that if you factor in contingent liabilities like losses on bad loans warehoused during banking reform, then the ratio shoots up to more than 50 per cent, Beijing will be left with far less fiscal slack.

As a result, Beijing is looking to local governments and banks to fund much of its package. However, with local government income from land sales down sharply with the property market slump, and with banks nervous about rising levels of bad loans, they may prove unwilling partners.

That means the 'real water' content of Beijing's package is going to be a great deal less than the 4trillion yuan announced on Sunday, and the chances that it will be able to sustain growth above the 8 per cent level are correspondingly weaker.

Certainly, the China economists at Morgan Stanley are unimpressed. Yesterday, they cut their growth forecast for 2009 from 8.2 per cent to just 7.5 per cent, despite the promised 4 trillion yuan.