Beijing's fiscal firepower not as fearsome as many think

Later this month, the mainland government is expected to announce a major spending package to help support Chinese growth through the coming global slowdown. Unfortunately, Beijing's fiscal firepower is not as fearsome as many believe.

With the outlook for the export- and investment-dependent mainland economy darkening rapidly as global growth slows, Beijing is casting around for policy measures to keep growth ticking over at the 8 per cent annual rate it needs to prevent a sharp rise in unemployment.

Other countries would either cut interest rates to ease business conditions or reduce personal taxes to encourage consumer demand. In China, neither looks workable.

Cutting interest rates would merely direct lending to the kind of over-invested highly polluting capital-intensive industries that Beijing is attempting to rein in.

At the same time, giving money back to ordinary people is unlikely to encourage a significant spending surge. With little state provision for health or education, Chinese consumers remain deeply cautious. Overcoming that wariness will take years of structural reform. It cannot be achieved with a simple handout.

As a result, the only way to achieve a counter-cyclical growth spurt is by ramping up government spending, in much the same way that former premier Zhu Rongji did in 1998 to overcome the effects of the Asian crisis.

Arguing that China's fiscal position is relatively healthy - Beijing ran a budget surplus last year after 20 years of deficits - many observers expect a hefty package of new spending measures worth hundreds of billions of yuan. They could be disappointed.