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Municipal stimulus: an end to rationality?

By Sun Qing: 0 Comment(s)Print E-mail China.org.cn, July 31, 2012

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Migrant workers take rest at a construction site in Beilun Power Plant in Ningbo City, Zhejiang Province. [By Wang Dingxu/Beijing Review]

Last Friday, one friend who worked for a trust company in Changsha called me, asking me if I wanted to hear a joke. He then continued with news of the announcement of a 800 billion yuan (US$140 billion) stimulus plan for the city of Changsha this year.

The announcement is certainly not a hoax ― news of the stimulus package was indeed released by the Changsha mayor's office. However, just by making a simple calculation, you can understand why my friend would regard the proposal as comedic.

Too "ambitious" to be Realistic

Changsha is the capital city of Hunan Province in Central China. It has a population of 6.5 million, less than 0.5 percent of the total population in China; with a GDP share of less than 0.06 percent. However, the proposed package of over 800 billion yuan is one-fifth of the country's 4 trillion-yuan stimulus during the 2009 financial crisis.

According to the information provided by the municipal government, there will be 195 "significant projects" included in the plan, including infrastructure projects for airports, inner city traffic system and other new developments. In addition to the 195 "significant" projects, there are another 155 "general" projects which are related to environmental protection and energy-intensive industries.

Maybe I am too being too realistic, but enacting 350 projects worth over 800 billion yuan for a population of only 6.5 million goes way beyond what is rationally feasible. The central government's 4 trillion yuan stimulus in 2009 contributed to rising inflation in 2010 and potential NPL (non-performing loans) problems for banks because of the scale of local financing platforms.

So even fantasists cannot take the Changsha plan seriously ― although some foreign readers may shrug it off, saying "this is China, after all."

During the Great Leap Forward of the 1950s, our nation's real progress lagged far behind the passionate optimism of the populace. The result was 3 years of chaos which nearly brought the country to the edge of collapse. Now that times have changed, how could we still try to formulate such a delusional, over-reaching plan?

When the news of the Changsha stimulus plan broke, no one has been as outspoken as I am in doubting its rationality, even though few people believe the plan will actually be realized. An analyst with a state-owned investment company was quite frank with me on this issue, saying "we see no possibility of such a big deal being realized; it's just a show or gesture, or even worse, another good chance to ask for resources from the central government."

Fund-raising another hardship to overcome

The above analysis is quite reasonable, since the central government has been adamant in helping China's central and western regions to develop their economy. As the central government has returned to a "growth focus" under the premise of a gloomy global and national economy, the announcement may be a good opportunity to secure additional funds. Another relevant element is that Changsha's local government transition has finished, so a new period in the city's development has begun.

It may be the right time for the local authorities to stimulate the local economy. But is the fund-raising target of 800 billion yuan achievable?

The mayor of the Changsha municipal government was quoted as saying "the projects to be implemented in the stimulus package will help to forge a platform between banks who are seeking high quality projects and companies [who are seeking] money."

With the overleveraging to local financing platforms that the 2009 national stimulus caused, banks have been relatively cautious towards "ambitious" new development projects, especially when municipal governments are facing the challenge of declining fiscal revenues due to reduced land sales and a slowing economy. However, banks could use the new capital injections as collateral for new loans. Whether banks will support the new stimulus plan is still unclear.

If banks fail to support the plan (which is almost certain), the "800 billion" plan will exist on only on paper. In China, bank lending is still the most important channel for investment stimulation, since capital markets are still underdeveloped and the roof on local government bonds is still relatively conservative (250bn yuanfor 2012). Whether China's central bank will support the plan is also certain. The National Development and Reform Commission (NDRC), China's top economic planning agency has ruled out the possibility of a new national stimulus package similar to the 2009 plan, even though during that period, the central government actually only contributed a very limited share of the 4 trillion provided.

Thus, I highly doubt enough money can be pooled for this ambitious stimulus ―and I'm not alone in this skepticism. Professionals like Huang Yiping of Barclays and Kuang Xianming of China Reform and Development Institute (Hainan) have also expressed their concern of how much money could be raised and where the money would come from.

What will happen if investment cannot be continuous? Lots of half-finished buildings and empty shells of concrete and steel, and a large number of NPLs for banks.

More Cities to Follow

The main reason why I'm so critical about Changsha "ambitious" plan is my fear that other municipal governments may follow this trend. One irrational person doesn't do much harm, but when a large group of people fall into the same craze, it can have damaging effects. If more cities learn from Changsha, maybe in the short term, there will a rapid expansion in the city's GDP growth, but hyperinflation will be not far away, and more NPLs will hurt banks and the whole financial system. I strongly encourage the Changsha municipal government to rethink its course.

The author is a financial journalist mainly covering international finance and fiscal policy.

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