Over-stimulated: economists argue against more Chinese stimulus

31st May 2012

On Sunday, China unveiled a massive $586 billion stimulus package in hopes of keeping economic growth from falling too quickly. But some academics warned that the policy move would be unnecessary, and could cause long-term damage.

"It is not necessary for China to launch another massive 4 trillion yuan stimulus plan. We must hold off any impulse of making excessive investment," said Liu Yuanchun, a professor at the Renmin University, according to the official People's Daily, the mouthpiece newspaper of the ruling Communist Party.

Chen Bingcai, a professor at the National Academy of Governance, warned against China expanding investment too much, sacrificing quality growth for high growth.

"If Beijing returns to an investment boom again, the previous call of adjusting the economic structure would turn out to be nothing but empty talk," the official China Securities Journal citing Chen as saying.

The trouble with stimulus

Similarly, The Washington Post's editorial board argues that especially in the long run, China's stimulus policy could mean trouble down the road:

"It means the perpetuation of a growth model that increasingly looks unsustainable – one based on continuous growth in investment. Beijing adopted the strategy when exports and foreign investment slowed after the 2008 global financial crisis."

"While much of the spending is worthwhile – the country's sparkling new airports and highways will propel more growth over time – more and more of it looks questionable. High-speed trains have literally crashed. Forests of apartment towers are rising around Chinese cities, inflating what looks to many like a real estate bubble."

"And who will buy the steel of those vast new plants in a market currently so glutted that one mill has switched to raising pigs?"

Less sceptical, however, is The Guardian's John Ross, who says in order to assess the impact of more fiscal stimulus; it is worth comparing the period following the launch of China's last stimulus package in 2008, with the results in Europe and the US over the same period. He says China's stimulus package worked because the core of the stimulus was state-led investment programmes targeting infrastructure and housing. While in Europe, economic policy failed because it was driven by a sharp fall in investment.

"In the three years up to 2010, the last for which full data is available, China's GDP rose by $2.1 trillion, of which $1.2tn was increased investment. State action in China therefore countered any investment decline. This, in turn, explains why China's GDP expanded since the financial crisis began and why its household income has risen sharply."


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