• Sat
  • Jul 26, 2014
  • Updated: 6:05am
BusinessEconomy

Chinese local governments urged to boost spending

Central government is pushing the mainland's provinces to release more funds for investment

PUBLISHED : Thursday, 26 June, 2014, 1:08am
UPDATED : Thursday, 26 June, 2014, 1:08am

The mainland's anti-corruption drive shows no signs of waning, but securing this year's economic targets also appears to be at the top of the government's agenda, with analysts saying fiscal policy is likely to serve as a major catalyst.

While local governments' spending on catering and other forms of entertainment may stay tight, they are being pushed to release more funds to speed up investment, even though fiscal revenue growth has eased amid an economic slowdown.

Authorities from Heilongjiang to Sichuan rolled out plans this week to boost fiscal spending and use subsidies as well as cash rewards to encourage new projects.

The change came after Premier Li Keqiang criticised local officials at a recent meeting for inaction, as their enthusiasm for fresh investments cooled amid concerns they could end up getting involved in anti-corruption probes.

Days after that meeting, Li reassured an international audience during a visit to Europe that there was no way the mainland would miss its economic targets, including "keeping economic growth at about 7.5 per cent" and "creating at least 10 million new jobs" this year. His promise prompted some analysts to raise their forecasts for gross domestic product growth this year.

"The anti-corruption campaign has dealt a blow to [fixed-asset investment] growth due to government officials and [state-owned enterprise] executives' inaction, either because they are in fear of corruption charges or because they are not financially motivated," said Bank of America Merrill Lynch China economist Lu Ting. "But since the Chinese government vowed to achieve the 'around 7.5 per cent' growth target, we believe in the short term Beijing will have to offset the demand shock by stepping up fiscal stimulus and monetary easing."

After the People's Bank of China made two cuts to lenders' reserve requirement ratios to free up more liquidity, the government is expected to avoid any strong monetary stimulus that could create new financial risks. Analysts say fiscal policy may become more active in driving growth, helped by further moderate easing of credit.

Heilongjiang's provincial government pledged on Monday to invest hundreds of billions of yuan this year and next, including 80 billion yuan (HK$100.61 billion) on railways and roads, 49.4 billion yuan on water projects and 27 billion yuan on agricultural production bases.

The province's GDP grew by just 4.1 per cent year on year in the first quarter, lagging all other regions of the mainland, where the overall economy grew by an 18-month low of 7.4 per cent.

The province also pledged to offer cash rewards for fast-expanding manufacturers and lower-tier governments that manage to achieve rapid fixed-asset investment growth.

Finance Minister Lou Jiwei warned on Tuesday that the central government might struggle to meet this year's fiscal revenue target, citing "persistent downside pressures in economic growth" and tax reform.

But analysts say there is room for a more expansionary fiscal policy.

Central and local government debt added up to just 40 per cent of the mainland's GDP, well below the 80 per cent to 90 per cent levels in some developed countries, Everbright Securities chief economist Xu Gao said.

The ministry was planning for a national deficit of 1.2 trillion yuan this year, or about 2 per cent of estimated GDP.

Share

For unlimited access to:

SCMP.com SCMP Tablet Edition SCMP Mobile Edition 10-year news archive
 
 

 

6

This article is now closed to comments

singleline
If the central government wants to treat us a dinner, and the local governments have to incur more debts to raise the necessary funds, then, at the end of the day, it’s the Chinese people who ultimately have to pay the bill.
(Chinese readers: ****business.sohu.com/s2013/others758/)
singleline
The following Chinese article, published on July 15, 2013, is still relevant today.
(****business.sohu.com/s2013/others704/)
If China’s GDP figure is not reliable, a point even admitted by Premier Li himself, why do we pay so much attention to the ‘price-floor’ of 7.5% annual GDP growth rate ?
singleline
Of course the local governments (LGs) can spend more in the coming months, but where does the money come from ?
If it is financed by tax, the private consumers and the enterprises will have less money to spend.
If it is financed by money printing, or so-called targeted RRR cuts, more money is created, adding to the present already-very-large pool of money stock, some of which are just empty-circling in the economy.
The country's residents will have to pay the inflation tax years later.
If it is financed by the central government’s rich fiscal reserves, the country’s ability to cope with future financial crisis will be diminished.
I don’t think some of the LGs have any fiscal reserves left.
If it is financed by borrowing, part of the country’s savings will be channeled to the LGs either through direct financing (say, bond issuance) or indirect financing (say, indirectly through the banks).
The resulting higher interest rate will further crowd out more efficient private investments.
Is it really so important to maintain the GDP growth rate set by the central government, instead of making the more important economic reforms ?
singleline
Is GDP the same as wealth ?
The quick answer is yes.
Adam Smith told us more than 200 years ago that the wealth of a nation is not measured by the amount of foreign reserves accumulated by the country through foreign trade, as was claimed by the mercantilists, but by the final amount of goods and services that can consumed by her own residents.
So, according to Smith, GDP is wealth.
Believe it or not, there are good savings and bad savings in a country.
Years ago, China’s savings were good savings. Most of them were channeled to productive investments, private or public, which produced many capital goods for the manufacture of final goods and services, to be consumed by the local and foreign residents, and resulting in China’s rapid economic growth in the past 30 years.
But now, like the situation in Japan years ago, some of China’s savings have become bad, because they are now inefficiently channeled to that parts of the economy (the inefficient SOEs and local governments, but not the efficient SMEs) to make those investments whose rates of returns no longer justify the costs of capital --- wasteful investments in short.
singleline
As a result, some parts of China’s present GDP is not wealth at all.
China is at present less wealthy than is suggested by her GDP figure, even if that figure is honestly reported and is not overstated.
If the Chinese local governments are urged to boost spending to sustain the country’s coming GDP figure, more of the country’s domestic savings will be used by them to produce more wasteful investments which are not self-liquidating.
A prominent example is the country’s high-speed-train system --- China's Ministry of Railways has almost no way to repay all their debts if it is not helped by the local or central goverment.
This ultimately means increasing the country’s level of bad debts in the future.
Only the private enterprises in China can use part of the excess savings in the most efficient manner and create real wealth for the country,
but now they have a hard time obtaining those savings at reasonable costs.
Is a bridge to nowhere part of the wealth of the country, like that in Japan ?
Doing so is not creating wealth, it’s destroying wealth.
singleline
‘Only when the tide goes out do you discover who's been swimming naked.’
--- Warren Buffett.
Only when China’s growth rate drops do we discover some of the weakest parts of the Chinese economy, which must include the country’s important banking system.
This system can’t channel money effectively to the real part of the economy which is most efficient and which is most in need of money, and so hindering the wealth formation of the country.
 
 
 
 
 

Login

SCMP.com Account

or