Experts warn on latest China stimulus package

The mainland's latest economic stimulus measures have exacerbated the already heavily laden balance sheets of provincial governments by encouraging them to take on more debt for infrastructure projects.

Massive spending on infrastructure projects is being undertaken by provincial governments, such as 829.2 billion yuan (HK$1.02 trillion) by Changsha, the capital of Hunan province, and a 3 trillion yuan stimulus by Guizhou province announced in July, despite the fact that provincial or municipal governments are still grappling with the legacy of the 4 trillion yuan package the central government launched between 2008 and 2010.

"It was actually much larger than 4 trillion. The 4 trillion was just a number announced. It was a massive expansion of bank lending. The size of the banking sector has exploded to double in the past three years," said Patrick Chovanec, a professor at Tsinghua University's School of Economics and Management in Beijing.

The government announced the 4 trillion yuan stimulus, but 12 trillion yuan was actually raised, mostly through local governments, Xu Chenggang, an economics professor at Hong Kong University, said.

At present, there is between 8 trillion and 9 trillion yuan of outstanding loans from that 12 trillion yuan raised for the stimulus, Xu estimates. Most of the money for the stimulus came from loans to local governments, which used land as collateral, he said.

"The central government has been trying to push down land prices. If land prices come down, either banks or local governments, or both, are in deep trouble. They still have to pay back their loans. Now banks are not willing to lend, as they are already in trouble."