Depending which view you ascribe to, the failure of Premier Wen Jiabao to announce a major new economic stimulus programme last week was either promising news or a decidedly ominous sign. Fresh stimulus measures had been widely expected in the run-up to last week's annual session of the National People's Congress, with some pundits even predicting Mr Wen would double the existing 4trillion yuan (HK$4.54 trillion) package Beijing unveiled last November. But in the event, there were no big new stimulus initiatives, only a modest tweaking of last year's programme. From one point of view, the absence of new measures can be taken as positive. The optimists argue that thanks to Beijing's early and determined response to the slowdown, last year's stimulus measures are already beginning to gain traction. They cite the improvement in China's purchasing managers indices over the last couple of months and factors like the stabilisation of domestic steel prices as signals that business activity is bottoming. With Beijing planning a budget deficit of 950 billion yuan this year (see first chart below), the optimists argue that the government should have few problems achieving its target economic growth of 8 per cent this year without rolling out new stimulus programmes. The pessimists, in contrast, see the lack of new initiatives as little short of disaster. They believe that officials have sunk into dangerous complacency following November's package. They point to the steep decline in international demand as evidence that the mainland's export sector is unlikely to recover any time soon, and argue that the government should drastically ramp up its spending now if it is to keep growth ticking over and avert political unrest. As usual, both views are overstated. The optimistic angle that November's package is already taking effect sounds reasonable, but is hard to sustain. True, China's PMIs have inched higher, but they still indicate that output is contracting. In other words, conditions are still deteriorating, just not as rapidly as a couple of months ago. That shouldn't be too surprising. The initial reaction of many companies to last year's slump in demand was to slow or even halt production and run down inventories. With stocks now depleted, production is picking up again, but, unfortunately, without any recovery in underlying demand. Meanwhile, although China's projected budget deficit looks impressive at first, on closer examination it appears a little less potent. At around 2.5 per cent of GDP, it is similar in relative terms to the deficits Beijing ran during the downturns at the beginning of this decade (see second chart). Moreover, most of the deficit is explained by shrinking revenues, rather than increased spending. In fact, official expenditure growth is projected to slow this year. That might seem to be at odds with the objective of Beijing's stimulus measures. But it is important to remember that the 4trillion yuan package announced last November was to be spread over more than two years, that it was only partially to be funded by the government, and that some of the projects had already been budgeted, and so did not represent additional spending. Yet if the optimistic view doesn't stand up, the pessimistic scenario has holes too. While it is true export demand has collapsed, the massive increase in bank lending over the last couple of months must have some stimulative impact, even if it is not showing clearly in the data yet. As a result, there is a strong argument to be made that Mr Wen was right not to announce more stimulus measures. If exports do begin to recover in the second half of the year, and if previous measures do prove effective, then a further initiative would be superfluous. On the other hand, if exports fail to rebound, and the existing stimulus measures don't deliver the expected growth and jobs, then Beijing will have done well to have kept its fiscal powder dry and not to have thrown good money after bad on more ineffective initiatives.