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The reality is always far away from the idea.
The depressively weary macroeconomic data in July crushed many economists’ optimistic forecast of the rebound of China’s economy in the middle of 2012. Many economic forecast institutions began to adjust the forecast of 8%-9% GDP growth rate of China. Then, how bad is the Chinese economy?
The year-on-year growth rate of CPI dropped to the lowest point in two years in July. It was accompanied with the decrease of imports and exports growth rate: the exports growth dropped to 1%, much lower than the 11.3% level in June; the imports growth was 4.7%, still lower than the figure in June. Meanwhile, the growth rate of value-added of industry and the investment in fixed assets all became lower than the market expectation.
The dissatisfactory figure is just the beginning. When people are talking about which of soft landing or hard landing will occur to the Chinese economy, the central government is wavering in easing the policy. Actually, hard landing could be felt in the real economy while local governments adopted self-rescue measures for “stable growth”. New projects are being planned and initiated. Ningbo, Nanjing and Changsha issued their own stimulus packages. Changsha even announced the investment package of 800 billion yuan while Guizhou Province’s stimulus package covers 3 trillion yuan – the said local version of 4-trillion-yuan stimulus package (a reminiscence of the 4-trillion-yuan package issued by central government in 2009).
Then, what are the differences between the two “4-trillion-yuan stimulus packages”? In 2009, the central government only contributes to the portion that equaled 5% of the GDP in that year while the rest part was finished through government finance and banking fundraising. In comparison, the local version’s capital source is not clear, but the strong potency is really shocking.
A truth not to sneeze at is that local governments are also players in the market. None of them have good days in depression. With the decreasing growth in financial income, here came out rumors that some local governments went bankrupt.
According to the data of the Ministry of Finance, in July, the financial income in China was 1067.2 billion yuan, 80.8 billion higher than last year. The growth rate was 8.2%, lower than the 9.8% growth rate in June. The Ministry of Finance attributed the slower economic growth rate to the lower financial income. The amazing 24% growth rate in financial income last year still stayed in someone’s mind, though the land trans- fer fee that local governments’ financial income rely on had a drastic increase in this year. The impotent financial income gave birth to local governments’ stimulus packages, but it is also a stain inside these packages. Local governments seemed to be desperate to get money. Punishment and fines became good weapons for their goal. That’s why business runners closed their stores in Shenyang due to the fear of being severely punished for tiny misbehaviors.
Then let’s look at Changsha. It offered 800 billion yuan to stimulate its economic growth. In 2011, its financial income amounted to 66.811 billion yuan and the GDP in this capital city of Hunan reached 561.93 billion yuan. It was reported that the only 31% of the planned investment was put into the key projects of Changsha and the investment into key commercial projects of this city only had 21.78% completed. An incomplete survey shows that Changsha only invested 5.604 billion yuan accumulatively in important projects in the first six months of 2012.
Furthermore, it is very doubtful that local governments can fund their 4-trillion-yuan stimulus package without promised support from banks or securities market. It is not hard to see that the real reason for the local stimulus package comes from their desire for political performance.
A Blueprint Drawn by Local Governments
Local governments have their plans, which are none other than striving for project planning with the combo of regional and industrial policies. When these projects are approved by the National Development and Reform Commission(NDRC), various measures of recruiting investment will follow, decorated by all kinds of sweet favorable conditions. That’s predictable, since local governments have little money in their pockets (or they are not willing to take money out).
In the other words, local governments drew a blueprint, trying to get support from all sides with beautiful forecast. The problem is, however, that these stimulus packages are hard to see positive results if the national policy is not eased enough.
The grand stimulus packages might have fast influence over the market. But local governments have no ability to select the most potential projects or to run them. The huge investment could usually lead to the new burden in the excessive production capacity or a wrong bet on technological upgrade.
In addition, private companies are hard to find their way into these packages unless they share close relations with local governments. The combination of government and enterprises is a place where corrupt deeds are most likely to happen. Moreover, the failure or mistakes are hard to be detected in time within that organization or hard to be cleared out even though they are found. The accumulation of mistakes increased the difficulty to correct the situation, which will lead to the overall collapse. A typical example is the photovoltaic industry, which just broke down with no players surviving. The lack of good plan was to be blamed and the “visible hand” of the government is also the defendant. So, what’s wrong with the Chinese economy? According to the classic economic growth theory, growth is directly related with technological upgrade, capital investment and labor force. Therefore, we can say that the economic growth of China in the past was a result of the cheap labor force, reform and opening up, and the joining into WTO. However, time changes and the demographic dividends and systematic dividends were run out in the past 30 years of fast growth – they are no longer capable enough to bring about substantial impetus for the economic growth.
We usually classify the investment, export and consumption as the “three traditional engines for pulling China’s economic growth”. In that frame, the investment was too big and the export was counted on too much. The low household consumption was criticized but not changed. Therefore, the call of “changing economic structure” is always heard when economic downturn appears.
Economics came from foreign countries and became an important subject in China in the recent 30 years. In real life we can see the conflict between “issues and ism”, such as the ones between inflation and oversupply of money, between excessive investment and insufficient consumption, and even between market and government.
But in truth, it only stays at the superficial level when it comes to the excessive investment in China. Even whether the excessive investment exists or not is not worth arguing. The capital stock per capita in China is much lower than the US, meaning that the investment needs to be increased. But increasing the investment is meaningful only when it is done properly and efficiently.
China Has No Excessive Investment but Wrong Investment
The excessive investment in China is better to be called wrong investment. What’s the reason? The long-term suppressive financial system caused the deformed structure of people’s deposits. The interest rate was lowered; the market access was limited; and the distribution of capital was distinct between state-owned companies and private companies.
The forceful interference into the natural waxing and waning of economy with administration methods will definitely lead to the disorderly economic changes. In 2009, a large amount of banking capital flowed into projects run by local governments and state-owned companies, which caused not only the inflation but also the large amount of wrong investment. The ineffective investment turned into the excessive production capacity and squeezed the profit space of private companies. Thus, the decrease of the investment return in China is attributed to the government-oriented investment. The great amount of credit loans in recent years ensured the 8% annual GDP growth rate at the cost of tiny or no progress in the reform of investment and financing system. The administrative dominance over financial resources must be broken. Only in that way could the growth impetus could be regained.
So, the 4-trillion-yuan stimulus package is not a panacea to solve the current economic problems, no matter it is from central government or local governments. China needs no economic stimulus package. It needs a deeper further reform. The future economic growth should be comprehensively dependent on all elements. The administrative control could work in a short while, but for the long term, systematic changes are the only one to be counted on.
The reform should be started with defining the government role in the economy. The government should leave the market alone and simply play the role as the rule formulator. It should also enhance the systematic constrain of its own rights.
The depressively weary macroeconomic data in July crushed many economists’ optimistic forecast of the rebound of China’s economy in the middle of 2012. Many economic forecast institutions began to adjust the forecast of 8%-9% GDP growth rate of China. Then, how bad is the Chinese economy?
The year-on-year growth rate of CPI dropped to the lowest point in two years in July. It was accompanied with the decrease of imports and exports growth rate: the exports growth dropped to 1%, much lower than the 11.3% level in June; the imports growth was 4.7%, still lower than the figure in June. Meanwhile, the growth rate of value-added of industry and the investment in fixed assets all became lower than the market expectation.
The dissatisfactory figure is just the beginning. When people are talking about which of soft landing or hard landing will occur to the Chinese economy, the central government is wavering in easing the policy. Actually, hard landing could be felt in the real economy while local governments adopted self-rescue measures for “stable growth”. New projects are being planned and initiated. Ningbo, Nanjing and Changsha issued their own stimulus packages. Changsha even announced the investment package of 800 billion yuan while Guizhou Province’s stimulus package covers 3 trillion yuan – the said local version of 4-trillion-yuan stimulus package (a reminiscence of the 4-trillion-yuan package issued by central government in 2009).
Then, what are the differences between the two “4-trillion-yuan stimulus packages”? In 2009, the central government only contributes to the portion that equaled 5% of the GDP in that year while the rest part was finished through government finance and banking fundraising. In comparison, the local version’s capital source is not clear, but the strong potency is really shocking.
A truth not to sneeze at is that local governments are also players in the market. None of them have good days in depression. With the decreasing growth in financial income, here came out rumors that some local governments went bankrupt.
According to the data of the Ministry of Finance, in July, the financial income in China was 1067.2 billion yuan, 80.8 billion higher than last year. The growth rate was 8.2%, lower than the 9.8% growth rate in June. The Ministry of Finance attributed the slower economic growth rate to the lower financial income. The amazing 24% growth rate in financial income last year still stayed in someone’s mind, though the land trans- fer fee that local governments’ financial income rely on had a drastic increase in this year. The impotent financial income gave birth to local governments’ stimulus packages, but it is also a stain inside these packages. Local governments seemed to be desperate to get money. Punishment and fines became good weapons for their goal. That’s why business runners closed their stores in Shenyang due to the fear of being severely punished for tiny misbehaviors.
Then let’s look at Changsha. It offered 800 billion yuan to stimulate its economic growth. In 2011, its financial income amounted to 66.811 billion yuan and the GDP in this capital city of Hunan reached 561.93 billion yuan. It was reported that the only 31% of the planned investment was put into the key projects of Changsha and the investment into key commercial projects of this city only had 21.78% completed. An incomplete survey shows that Changsha only invested 5.604 billion yuan accumulatively in important projects in the first six months of 2012.
Furthermore, it is very doubtful that local governments can fund their 4-trillion-yuan stimulus package without promised support from banks or securities market. It is not hard to see that the real reason for the local stimulus package comes from their desire for political performance.
A Blueprint Drawn by Local Governments
Local governments have their plans, which are none other than striving for project planning with the combo of regional and industrial policies. When these projects are approved by the National Development and Reform Commission(NDRC), various measures of recruiting investment will follow, decorated by all kinds of sweet favorable conditions. That’s predictable, since local governments have little money in their pockets (or they are not willing to take money out).
In the other words, local governments drew a blueprint, trying to get support from all sides with beautiful forecast. The problem is, however, that these stimulus packages are hard to see positive results if the national policy is not eased enough.
The grand stimulus packages might have fast influence over the market. But local governments have no ability to select the most potential projects or to run them. The huge investment could usually lead to the new burden in the excessive production capacity or a wrong bet on technological upgrade.
In addition, private companies are hard to find their way into these packages unless they share close relations with local governments. The combination of government and enterprises is a place where corrupt deeds are most likely to happen. Moreover, the failure or mistakes are hard to be detected in time within that organization or hard to be cleared out even though they are found. The accumulation of mistakes increased the difficulty to correct the situation, which will lead to the overall collapse. A typical example is the photovoltaic industry, which just broke down with no players surviving. The lack of good plan was to be blamed and the “visible hand” of the government is also the defendant. So, what’s wrong with the Chinese economy? According to the classic economic growth theory, growth is directly related with technological upgrade, capital investment and labor force. Therefore, we can say that the economic growth of China in the past was a result of the cheap labor force, reform and opening up, and the joining into WTO. However, time changes and the demographic dividends and systematic dividends were run out in the past 30 years of fast growth – they are no longer capable enough to bring about substantial impetus for the economic growth.
We usually classify the investment, export and consumption as the “three traditional engines for pulling China’s economic growth”. In that frame, the investment was too big and the export was counted on too much. The low household consumption was criticized but not changed. Therefore, the call of “changing economic structure” is always heard when economic downturn appears.
Economics came from foreign countries and became an important subject in China in the recent 30 years. In real life we can see the conflict between “issues and ism”, such as the ones between inflation and oversupply of money, between excessive investment and insufficient consumption, and even between market and government.
But in truth, it only stays at the superficial level when it comes to the excessive investment in China. Even whether the excessive investment exists or not is not worth arguing. The capital stock per capita in China is much lower than the US, meaning that the investment needs to be increased. But increasing the investment is meaningful only when it is done properly and efficiently.
China Has No Excessive Investment but Wrong Investment
The excessive investment in China is better to be called wrong investment. What’s the reason? The long-term suppressive financial system caused the deformed structure of people’s deposits. The interest rate was lowered; the market access was limited; and the distribution of capital was distinct between state-owned companies and private companies.
The forceful interference into the natural waxing and waning of economy with administration methods will definitely lead to the disorderly economic changes. In 2009, a large amount of banking capital flowed into projects run by local governments and state-owned companies, which caused not only the inflation but also the large amount of wrong investment. The ineffective investment turned into the excessive production capacity and squeezed the profit space of private companies. Thus, the decrease of the investment return in China is attributed to the government-oriented investment. The great amount of credit loans in recent years ensured the 8% annual GDP growth rate at the cost of tiny or no progress in the reform of investment and financing system. The administrative dominance over financial resources must be broken. Only in that way could the growth impetus could be regained.
So, the 4-trillion-yuan stimulus package is not a panacea to solve the current economic problems, no matter it is from central government or local governments. China needs no economic stimulus package. It needs a deeper further reform. The future economic growth should be comprehensively dependent on all elements. The administrative control could work in a short while, but for the long term, systematic changes are the only one to be counted on.
The reform should be started with defining the government role in the economy. The government should leave the market alone and simply play the role as the rule formulator. It should also enhance the systematic constrain of its own rights.