China plays a waiting game on the economy – and bets everything on the belt and road plan

China’s stimulus measures have stabilised the financial system and helped struggling local governments, rather than kick-started another growth cycle

Expect similar measures in the coming years, as Beijing seeks to maintain stability while exporting its economic model via the belt and road initiative

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An electric delivery vehicle drives past a banner with a government slogan in Beijing. China is introducing stimulus measures to stabilise the financial system and help financially troubled local governments, but not to restart the economy. Photo: Reuters

Published: 10:25am, 9 May 2019Updated: 10:21pm, 9 May 2019

China has been pump-priming its economy since January, in a reversal of recent deleveraging. The policy change is likely to stabilise the financial system and help financially troubled local governments, but won’t kick-start another growth cycle. Expect to see more of this sort of stabilising stimulus in the coming years. China is aiming to keep its economy on the treadmill – to keep it running on the same spot.

According to the People’s Bank of China, aggregate financing surged to 8.18 trillion yuan (US$1.2 trillion) in the first quarter, a 40 per cent year-on-year increase. However, it appears to have mainly lifted the financial system, rather than the economy. The stock market rose strongly, and the land market in small cities recovered somewhat. But when it comes to the real economy, import growth remains weak whether in absolute terms or relative to export growth. This is troubling, given that the difference between Chinese exports and imports, preferably measured by data collected by China’s trading partners, may be the best indicator of the strength of Chinese domestic demand.

The stimulus has stabilised the financial system, for now. As government consumption and infrastructure investment – mostly led by local governments – are about 40 per cent of GDP, local government finance is vital to financial stability. When they are short of cash, they don’t pay. As IOUs pile up in the supply chain and the financial system, the resulting crisis of confidence might lead to a financial crisis. This is why the government tends to go back to debt when confidence becomes very fragile.

Most local governments depend on land sales and sales taxes on new property for their finances. When banks turn on the spigot for developers, money quickly flows to local governments. As they pay off some IOUs, the tension in the financial system eases.

However, credit stimulus is no longer a tool for promoting growth. The current levels of debt are so high that such a policy would bring about a financial crisis. The government’s most important goal is to prevent a financial crisis. Hence, it is unlikely that the government will introduce a massive stimulus package, like it did after 2008. Another growth cycle could only be led by efficiency improvement.

But efficiency or productivity is precisely China’s problem at the moment. There are two main barriers to China’s productivity growth. The macro imbalance has been talked about for a long time. According to data from the National Bureau of Statistics, household disposable income is 43 per cent of gross domestic product and consumption, 30 per cent. Government consumption is 15 per cent of GDP. The remainder is mostly investment.

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