WHEN CHINA UNVEILED a $600 billion stimulus package in November 2008 it caught the world on the hop. Governments from Washington to Canberra eyed this largesse with longing, envious of Beijing’s ability to funnel vast amounts of cash into domestic industrial projects literally overnight.
For most of 2009 China was hailed as a steady hand on the wheel, steering the world through the worst of the global recession. But what few asked at the time was how Beijing was splashing the cash – and if anyone was overseeing the largest Keynesian fiscal package since the Great Depression.
A few simple but scary truths are now starting to emerge. First, the country’s leaders had neither hand on the wheel: they were driving blind and hoping no one would notice. Most of the $600 billion package – siphoned into the vast hinterland via leading state banks – wound up in the pockets of local authorities, most of which invested in pet projects designed to create short-term jobs, not long-term returns.
Such misdirected munificence will have two unintended consequences: crises lifted straight from China’s 1990s playbook. The first will be the virtual bankruptcy of dozens if not hundreds of heavily indebted municipal authorities.
