China takes infrastructure road
Can a spending spree mask problems in banking and the broader economy?
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.