Permanent stimulus is putting China's economic health at risk
The Ministry of Finance recently urged local governments to speed up fiscal spending, while the People's Bank of China pledged to offer greater financial support to the country's exporters and importers.
The central government also called for a strengthening of investment in selected areas such as railways and social housing construction.
SCMP, June 14
I personally have never found any need for amphetamines but I know people who do and I recognise their effect. I recognise it in economic performance, too.
Is your economy feeling a little slow? Here's a stimulant for you, and another, and another, and, yes, just watch those economic growth figures rise again. Gross domestic product does indeed respond to the application of economic amphetamines.
But it does so with the same sorts of risks that amphetamines pose to the individual. We need our recessions. They force us to reconsider the investment directions we take and to change course when circumstances change. We certainly never do this in economic boom times. Then it's all just pedal-to-the-metal in the direction we happen to be going.
Trying to continue at top speed when all the signs say it's time to slow down only risks burn-out and lasting debility. It is as much so in economic matters as it is in personal health and where that debility plays out in the economy is in the health of the financial system.
Specifically, continued stimulus endangers the recoverability of advances made by the banking system. Loans still appear solid, interest on them is still paid, but underneath all this, the recoverability of the principal becomes ever less certain.
Take the four examples cited in the excerpt above. Local governments were also urged to speed up fiscal spending in 2008 in order to keep economic growth high. They reportedly sourced as much as eight trillion yuan (HK$10.08 trillion) from the banking system to do it and many of the resulting projects have produced little return on the investment.
This should hardly be surprising. If the object is to push up headline GDP figures then a highway from the governor's office to his mistress' doorstep will do the job as well as any more useful transport project.
No bank in China will institute bankruptcy proceedings against a provincial government. It will just make more advances to cover interest payments on past advances and less money will then be available for real investment.
Similarly, offering greater financial support for the country's exporters is like pushing against a rope. Export growth is determined by market demand abroad and right now international demand is a little slow. Pushing exporters in China to export does not make consumers in Spain buy. It is just wasted effort at such times.
High-speed rail is potentially an even bigger waste of money. The government railway authorities are very close with their figures but it appears that revenues from the high-speed system may not even cover operating costs, let alone the enormous cost of building the system.
Again, it should not be surprising. The costly initiative was undertaken largely for reasons of national prestige, not commercial viability. People won't buy tickets at prices that would yield a return on the full investment.
This would be all very well if Beijing were willing to pick up the difference out of fiscal revenues but, while it was originally thought that private sources would provide some of the funding, in the end it all came from the banks under edict from the state. That just weakened the banks further.
Much the same will happen with social housing. I have never been quite sure what the term means but invariably it implies heavy subsidy of housing costs.
This will be all very well if Beijing provides the subsidy but I suspect it will be made through bond issues to which banks will be pressured to subscribe.
Command economies generally undermine themselves and vanish through financial crisis if they don't first do so through war. I doubt that China's will do so through war and I do not expect a sudden Soviet Union-style collapse.
But I think Beijing is taking on greater risks than it realises with this constant application of economic amphetamines.