HONG KONG, China — With all signs pointing south for the Chinese economy, Beijing thinks another stimulus can turn things around. But experts wonder, is more of the same really what China needs?
The first five months of 2012 have seen a parade of uncharacteristically iffy economic data out of China. First quarter GDP growth was 8.1 percent, a three-year low. Electricity output slipped. Bank lending slowed. Retail luxury sales dropped. The manufacturing index hit its seventh straight month of contraction in May. And that’s not even counting the doldrums from Europe that are likely contributing to China’s economic troubles.
Of course, 8 percent growth — if accurate, and China’s stats do draw skeptics — is nothing to sniff at.
Still, with China bears licking their lips at signs of weakness in the world’s second largest economy, Beijing has indicated that a series of stimulus measures are in the offing.
While authorities have stated that they will not issue a stimulus on the scale of the $630-billion one launched in 2008, which succeeded in staving off catastrophe, analysts expect it will still be sizable.
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According to Tao Dong, chief economist at Credit Suisse, the government is deciding whether to unleash up to 2 trillion yuan ($315 billion) into the economy to stave off a slowdown. Officials have already rolled out a cash-for-clunkers-type program, designed to entice people to buy new cars, as well as subsidies for new energy-efficient air conditioners and televisions.
In addition, the state agency responsible for approving huge investment projects has gone into overdrive. Since the beginning of 2012, the National Development and Reform Commission has signed off on more than twice as many projects as in the same period last year, according to the Wall Street Journal. Some of the main beneficiaries are steel plants, with $20 billion approved to build two new facilities in the last week alone.
Given that there are already too many Chinese steel plants — 110 million metric tonnes of excess capacity this year — all this investment raises the question: Would the stimulus only make China’s imbalances worse?
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Though its scorching expansion has been the envy of the world for a decade, the flaws of the “Chinese model” have begun to show. Its GDP growth has largely been fueled by capital investment — building highways, apartments, factories, airports, high-speed rail — instead of consumption. Such spending accounted for over half of China’s growth last year. In 2010, according to the World Bank, capital investments in China amounted to 45 percent of GDP — an unprecedented rate that many economists say is unsustainable.
As a result, some analysts are critical of the plan, noting that a second stimulus would simply reverse the effects of Beijing’s post-crisis attempt to cool and restructure the economy.
Analysts at Barclays wrote that “many government officials argued repeatedly during the past year that tolerating slow growth is critical for rebalancing the economy,” but now China is “already implementing a second stimulus package.” This raises two fundamental questions, they wrote: “whether the economy can ever graduate from the state-investment-driven stage, and whether the economic transformation will ever happen.”
But with global markets looking wobbly and Europe on the brink — not to mention China’s leaders trying to maintain stability in the midst of a major power transition that has already gone much worse than expected — there may be a certain pragmatic wisdom in spending in the short term, and pushing the tougher questions further down the road.
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