China walking debt tightrope
As the European Central Bank unveiled its plan to save the euro, the currency zone's economic woes were making themselves felt in its two biggest trading partners, China and the US. Beijing has announced hundreds of billions of yuan in stimulatory infrastructure spending on road, rail, ports and water projects to combat slowing exports and economic growth. In the US, news that employers added less than 100,000 new jobs in August, compared with 130,000 in recent months, dealt a blow to hopes for economic recovery.
The policy moves in Brussels and Beijing boosted world markets. But at best they may buy more time for a sustainable turnaround in Europe. ECB president Mario Draghi had promised it would "do whatever it takes" to save the euro. As expected he announced it would buy short-dated government bonds to ease borrowing costs. Market anticipation had already succeeded in bringing down ruinous rates for Spain and Italy. There is no question the ECB has almost unlimited financial firepower to keep yields down. But the worry is its ability to prevent the moral hazard that governments will misuse the money to placate voter anger at austerity measures. The ECB proposes buying only the bonds of governments that sign up to fiscal and structural reforms. If it applies the ultimate sanction of cutting off support to a government that reneges on reforms it would not only book losses on its bond purchases but risk a break-up of the euro. Neither Spain nor Italy is showing any hurry to sign up. Governments that do will have to pay more than lip service to euro-zone budget rules. The desired reforms must be enforceable through greater euro-zone integration. Otherwise the dire misgivings of the sole dissenter from the ECB plan, the German central bank, may yet be proved right.
It is to be hoped that China's planned infrastructure is better targeted at specific projects with demonstrable economic benefit than much of the stimulus spending during the global financial crisis. But when greater domestic consumption is needed to put the country's economy on a more sustainable growth path, it still adds to the lopsided investment component of China's GDP. It is therefore good to hear President Hu Jintao pledge at the weekend to boost domestic demand and promote more balanced growth. Given that analysts are concerned about the funding of so many new projects, Beijing will have to ensure they do not add to the emerging legacy of debt from the stimulus spending.