With infrastructure spending to boost growth in the limelight for the world’s leading economies, it was perhaps appropriate that China, a country renowned for its engineering skills and planning, should be the first to show its hand.
Last month the government announced a Rmb4 trillion ($586 billion) fiscal package, over the next two years, betraying its fears that China’s growth was slowing faster than expected.
Although officially annual GDP growth is at 9%, some analysts believe the rate could fall to 7% or less – the critical level that China has to achieve in order to absorb the new labour entering the economy each year.
Morgan Stanley reckons the package could contribute 2.5% to China’s GDP growth this year and, although other observers are less bullish, its headline figure appears impressive. The total constitutes 14% of GDP in aggregate. On closer inspection, however, the package is less than the sum of its parts.
One criticism is that only about half of the spending is actually new. The rest consists of projects already announced but now being brought forward. Another issue is that the central government is providing just a quarter of the funds. Local government, state-owned banks and companies will offer the rest. How they will do so is not yet clear although more bond issues, greater bank lending and more local government expenditure will be necessary.
A slowing economy means that the banks are facing the prospect of an increasing number of non-performing loans. And although the Chinese government has encouraged them to increase their lending levels, through the removal of credit ceilings, it’s not certain what their capacity to do so is.
The true health of China’s leading banks is still clouded in much mystery. In October, one of the big four lenders, Agricultural Bank of China, received a $14 billion capital injection from the state in preparation for an IPO, probably next year. ABC is, admittedly, the weakest bank in China’s financial system, with about five times the national average of bad loans on its books. Still, all of China’s banks have a history of impairments.
What will also be interesting is the regional dispersion of the spending. Wealthier local governments with plans already in place will be much better placed to finance the spending. As economist Rachel Ziemba points out in her blog, key developed regions will be prioritized – local media suggest the government has identified 12 that will receive Rmb1.5 trillion this year.
In spite of its flaws, it is imperative that the package begins to take effect quickly. Already provinces such as Guangdong are seeing signs of civil unrest as unemployment rates pick up.
In March 2007, the Chinese government announced an 18% boost in military spending for the coming year, the largest such increase in a decade. Let’s hope those extra troops are not needed to maintain social order.