Stimulus or not ?China tries to repeat the successes, without the mistakes, of the 2008 stimulus

Jun 2nd 2012 | HONG KONG | from the print edition

(Important Notice: I could not find the author's name in the article, but the credit was given to The Economist. Please use this article and my comments for academic communication only. If you want to use any part of the article's contents, please contact The Economist individually.)

DURING a trip to Hubei province in central China from May 18th to 20th China’s prime minister, Wen Jiabao, argued that the government should give “more priority to maintaining growth”. This was hardly a bombshell. His words nonetheless reassured investors who felt that the government had been late in reacting to the sharp slowdown in China’s economy revealed by a run of bad figures, including a drop in industrial growth to its most sluggish rate since mid-2009.

A few days later the government began to back his words with deeds, speeding the approval of infrastructure projects, permitting three huge investments in steel plants, and increasing its financing for public housing. This came on top of 36 billion yuan ($5.7 billion) of subsidies for energy-saving household appliances and ongoing efforts to increase bank lending. The Ministry of Railways, for example, said it had secured a generous line of credit.

This was a “mini-me” stimulus, according to Stephen Green of Standard Chartered, a diminutive clone of the November 2008 package unveiled in response to the global financial crisis. But this mini-stimulus still lacked something that distinguished the earlier package: a price tag. The 2008 stimulus was billed from the start as a 4 trillion yuan package ($586 billion at 2008 exchange rates), an enormous sum that amounted to about 13% of China’s GDP (although the stimulus was scheduled to last more than two years). No comparable total has yet been offered for China’s piecemeal efforts this month.

This omission is not just a statistical oversight. It provides a clue to the government’s deep ambivalence as it considers how to respond to worries at home and abroad. The 4 trillion yuan sum in 2008 showed that the government was prepared to go to almost any lengths to revive growth. That commitment helped to lift the spirits of entrepreneurs, officials and consumers, encouraging them to keep spending too. The message sent was as important as the amount spent.

In retrospect, that message was heard too loudly and clearly. Local governments and banks rushed to take advantage of the central authorities’ indulgence while it lasted. The surge in spending and lending succeeded in rescuing China’s economy from the crisis. But it left an awkward legacy of stubborn inflation, messy local-government finances and skewed investment.

The central government does not want to repeat that mistake. It has therefore refrained from advertising the scope of its commitment to growth. But investors abhor a vacuum. In the absence of any official estimate of the size of the stimulus, market-watchers looked for an unofficial figure to fill the gap. In a research note on May 28th Dong Tao of Credit Suisse, a bank, calculated that the extra investment orchestrated by the government might amount to 2 trillion yuan, although he cautioned that it was “too early to come up with a precise quantification”.

His estimate nonetheless suggested that the “mini-me” stimulus of 2012 might not be so mini after all. The figure was seized on by the media, stirring a modest rally in Asian shares. If the government was concerned only with growth, it might have been happy with this immediate revival of animal spirits. Instead it chose to quash it. A report from Xinhua, the official Chinese news agency, pointed out on May 29th that “there won’t be any massive stimulus plan to achieve high growth”. That was enough to undo the stockmarket rally.

The central government thus seems keen to dispel any suggestion that its 2012 stimulus efforts might entail the same loss of discipline as in 2008. The mini-me stimulus will be both smaller and better behaved.

My comments below:

I want to emphasize that I do not want to deal with anything in politics and my comments are only related to economics before I start to post my comments here.

Now I want to discuss three main points that I concern with you guys:

1, Regardless of results, China government always makes efforts to promote the national economic growth and improve its people's living standards. Although the government's stimulus package tried to help China recover from 2008 Global Financial Crisis, it was not quite successful. I agree with the author that local governments reacted quickly to implement the central government's recovery policy that did not work well, but keep in mind that every region had its own situation. Therefore, the central government's recovery plan only offered a main recommendation to all regions' economic developments. Each local government should follow the central government's recommendation, but the local government needs to add more details to the recommendation in order to best fit its own needs.

2, The 2008 stimulus package worth 4 trillion yuan which was much larger than 2012 stimulus package ("Stimulus or Not" par. 3). As the government tried to make its greatest effort to recover China's economy from every aspect, investors, consumers and other people only knew one thing that is to spend money and promote national consumption. However we need to be rational consumers and investors. Do not spend money on everything just because you are given a lot of money. Furthermore, local governments neither consider its local situation nor make a particular recovery plan to rescue its local economy. Thus, the country's recovery plan did not work very well on some regions. However I disagree with the author's viewpoint, because the mistake was not made by the central government but local governments. If local governments could carefully apply the central's government's policy to design particular recovery plans to fit their own situations, then local economies and investments would not be messy and the use of the national stimulus plan would be maximized.

3, The article mentioned that "The central government does not want to repeat that mistake." Therefore the government used a mini stimulus package in 2012 ("Stimulus or Not" par. 6). With a smaller stimulus package in 2012 than in 2008, the government is able to carefully apply the limited fund to satisfy the nation's most urgent needs, such as enhancing the current health care system, rather than boosting China's economic growth without a careful design. Meanwhile, the central government could set requirements for using its funds. If a local government did not match all of the requirements or engaged in launching any unnecessary projects, the local government would not be able to receive funds from the central government next year. Therefore, all of local governments should use their limited fund to satisfy their regional most urgent needs. Moreover, less government intervention will be made in stock market in 2012 than in 2008 due to the mini stimulus package. As a result, a freer market could be achieved and more profits could be generated from freer trade this year than in 2008.

In short, I did not thoroughly analyze the whole article but focused on commenting some main points mentioned in the article. If you are interested in analyze the whole article, please do so and feel free to post your constructive comments below.

Thanks again for reading this article and my comments.