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Editorial: How China Should Dispel Fears of ‘Massive Stimulus’

While calling for “stable investment,” China’s decision-makers have also sent out a signal that they will not engage in a flood-like “massive stimulus.” The Sept. 18 regular meeting of the State Council called for “stabilizing investment to maintain normal growth, in accordance with the principle of not relying too much on investment but without stopping investment, to prevent fluctuation.” The next day, Chinese Premier Li Keqiang reiterated at the World Economic Forum’s “Summer Davos” meeting in Tianjin that “China will not continue its old way of relying only on investment,” but that the country will “continue to promote rational and effective investment.” However, concerns about a “massive stimulus” have been difficult to dispel, and have been heard at multiple high-level forums recently. This is something worth being vigilant about and worth reflecting on.

Since the beginning of the year, the speed of China’s fixed-asset investment growth has fallen, and infrastructure investment in some regions has clearly decreased compared with last year. Official figures show that fixed-asset investment grew 5.3% year-on-year from January to August, compared to the 7.2% growth seen in the same period last year. Out of this, capital construction investment grew only 4.2% year-on-year, compared to 19% in the same period last year. However, the overall performance of fixed-asset investments can still be considered normal, especially real estate and manufacturing industry investment, which have both had an outstanding performance and have to some extent made up for the decline in fixed-asset investment growth. To date, the central government has maintained a rational and restrained attitude, saying it will not take its old path of a “massive stimulus.” This is worth affirming.

However, factors that include the relatively large downward pressure on China’s economic growth, as well as the U.S.-China trade war, have caused massive external uncertainty. This is the greater context for people’s strong concerns. These fears are not groundless, and have some historical and actual basis, and are completely understandable. The Chinese government at all levels has long had the habit of conducting macroeconomic adjustment by immediately increasing infrastructure investment and loosening controls on the money market whenever there are suboptimal economic conditions. The 4 trillion yuan ($580 billion) stimulus policy put into place after the global financial crisis broke out is still fresh on everyone’s minds. The current situation in China is similar to what the country faced then, so it’s natural that worries are resurfacing. Market sentiment has also become exceptionally sensitive. Recent rumors that banks’ investment in local government debt would soon have zero weighting in their credit risk assessments have caused many to speculate about a “massive stimulus.” People are also worried that the cost of many “micro-stimulus” measures combined may not be less than that of a “massive stimulus.”

Experience has shown that using massive amounts of investment to stimulate economic growth is an unsustainable practice, and one that loses its effectiveness with time. The percentage points of gross domestic product growth that can be attributed to each trillion yuan worth of fixed-asset investment falls each year. The practice also raises the leverage of government and enterprises, causing fiscal and financial risks to accumulate. If China engages in massive stimulus again, years of supply-side structural reforms and their hard-earned results could become partially undone. The work put into cutting capacity and deleveraging could be irrevocably lost.

A massive stimulus is unacceptable, but this doesn’t mean that China should reject all investment. It is still necessary to encourage fixed-asset investment in areas where there is a shortfall. As the recent State Council meeting pointed out, China must adhere to national planning and a major strategy, expanding infrastructure in poorer regions, basic transportation networks, trunk waterways, hub and branch airports and major irrigation works, among other areas. These measures, coming at a time of stabilized investment, will help steady employment levels, aid poverty alleviation efforts and promote balanced development between different regions, expanding China’s space for future economic development. Additionally, other areas where there are problems of backward infrastructure, such as urban drainage systems and agricultural irrigation, have long been on the government’s agenda, and should be resolved through increased investment. While making these targeted investments, China should also pay attention to improving the efficiency of capital utilization to avoid excessive investment but low usage of infrastructure. It should also pay attention to setting boundaries for government investment, in order to boost the confidence of private entrepreneurs and stimulate private investment.

Fears of a “massive stimulus” are difficult to dispel because the Chinese economy has not yet completed its transition between old and new drivers, and has insufficient intrinsic impetus for growth. The Mastercard Caixin BBD New Economy Index has hovered around 30 for years, meaning new-economy industries have accounted for around 30% of total economic input. This should remind us not to overestimate the actual function of the new economy. Ultimately, in order to continuously enhance intrinsic growth impetus and realize the transition to new economic drivers, China must continue to deepen supply-side structural reform. To achieve this, China should deepen the reforms of streamlining administration and scaling back administrative power, lifting or integrating regulations and optimizing services in the area of investment. It should also break administrative monopolies in sectors like transportation, telecommunications, and oil and gas; broaden access to modern services industries; treat all enterprises equally, whether state-owned enterprises or private ones; and create a business environment with fair competition, especially through implementing and improving policies and measures that support the private sector, to stimulate private investment.

Recently, views like suggesting an impending “second socialist takeover of business” and “the private sector leaving the stage” have become hot topics. Regardless of whether the people mentioning these views are for or against, the government should shine a light on the issue in a timely manner, stabilizing public expectations. At the same time, it must realistically alleviate the problem of difficult and expensive financing for the real economy. It must also implement and roll out the policy of tax cuts and reduced fees as soon as possible to truly reduce the burden on businesses.

The Chinese government must be especially vigilant against people from industries with overcapacity and capital market participants relentlessly advocating economic stimuli and the relaxation of monetary policy. Deleveraging measures and stricter supervision in recent years have indeed made their lives more difficult, and they hope that a massive stimulus will end the long drought they have experienced. The government should strengthen its ability to withstand voices like these, which speak purely out of self-interest.

It is now impossible for China to go down its old path of relying entirely on investment to stimulate economic growth. This is also something the central government is unwilling to do. However, the market is waiting to see if the government’s resolve will withstand the test of further downward pressure on economic growth. Ultimately, the government must fulfill its commitment to deepening reforms in order to lift market confidence. It must implement the top-level strategy it has already set, with greater confidence, to allow market participants to receive tangible dividends from reform. Only then can China consolidate its economic “base” in order to face new challenges at home and abroad.

Translated by Teng Jing Xuan (jingxuanteng@caixin.com)

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