Published February 23, 2009

China's stimulus spending may add up to a whopping 30t yuan: analysts

By ANTHONY ROWLEY
IN TOKYO

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THE total amount of fiscal stimulus planned by provincial governments in China to counter the global economic slump may have been vastly underestimated and could amount to as much as 30 trillion yuan (S$6.7 trillion) or more than seven times the four trillion yuan figure that has been announced publicly by the Chinese central government, experts have told The Business Times.

This could enable China to meet its gross domestic product (GDP) growth target of around 8 per cent in 2009 at a time when other leading economies, including those in the US, Japan and Europe, are in recession and facing the prospect of dramatic contraction this year.

Lawrence Lau, president of the Chinese University of Hong Kong, suggested in Tokyo last week that, with the aid of official stimulus, China could attain its growth target this year despite the collapse in the country's manufactured exports to the US and elsewhere.

Masahiro Kawai, dean of the Asian Development Bank Institute (ADBI) in Tokyo, told BT that total spending by Chinese provincial and other local authorities over the next two to three years could reach a colossal 30 trillion yen in total, which is equal to some 135 per cent of China's GDP.

It would dwarf the size of fiscal stimulus announced so far by the US government and also that in other leading economies such as Japan - in both absolute and GDP-relative terms.

The Chinese central government announced a stimulus package of four trillion yuan or some US$588 billion late last year after it became clear that the country's economy was going to be hard hit by the global export slowdown, raising the prospect of severe unemployment in China.

This did not take into account the spending power of Chinese provincial governments that have amassed sizeable war chests of fiscal reserves during the long economic boom from a mixture of tax revenues, the leasing of state-owned land and other channels.

Chinese provincial governments are being encouraged now to go ahead with projects that previously were held back at the insistence of Beijing while China's economy was growing at double-digit annual rates and generating inflationary pressures in the process. They are using both their own resources and borrowing from banks, once Beijing approved the spending.

Last week, for example, Jiangsu province and 35 state-owned enterprises (SOEs) in China signed contracts on 45 investment projects in Beijing for a total of 222 billion yuan. The projects, focusing on infrastructure construction, manufacturing and service sectors, will receive investments from SOEs as well as using local resources.

Kimiyasu Nakamura, president of Dongfeng Motor Company, a motor manufacturing joint venture between the Chinese government and Japan's Nissan Motor, suggested recently that provincial governments in China were planning to spend around 18 trillion yuan on stimulus measures over the next two to three years.

This would be equal to more than 80 per cent of the size of China's GDP which amounted to some US$3.35 trillion or 22 trillion yuan in 2007 (the latest year for which official statistics are is available).

The figure could include some double counting, Mr Nakamura said, implying that the figures compiled by Dongfeng Motor from local governments in China could possibly be overstating the amount of stimulus spending.

But the figure given by ADBI's Mr Kawai suggests that even Mr Nakamura's estimate may greatly understate what Chinese provincial governments are planning to spend. The ADBI networks with numerous research institutes around the Asia region, including some in China, and is able to collect data from many official and other sources.

The growth generated by official stimulus will be of a different kind to that which has driven China's GDP to increase at double-digit rates in recent years, based largely on exports of manufactured consumer goods.

Instead, much of the new growth will be powered by spending on infrastructure to link urban coastal provinces with rural inland areas. This will generate domestic growth and employment but its impact on the rest of Asia through trade is less obvious, experts say.