China’s Government Is Still On A Spending Spree

After stressing the necessity for political reforms in China, Prime Minister Wen Jiabao is now calling for stable and consistent growth, a position that has been well-received by the markets. A new stimulus plan to boost internal demand is on the horizon, although most likely not of the same magnitude as the one in 2009 that protected China from the international crisis with massive amounts of cash.
The effects of the economic slowdown in this globalized world have caused a great deal of concern. Waning global demand for Chinese exports is slowing down, and is leaving its mark on the country’s economy. Exports in April grew a mere 4,9% this year, whereas in 2011 they grew a staggering 30%. Industrial production is also growing more slowly, and real estate prices have begun going down, after a spike in the preceding months. Car dealers are bracing for a season of deep discounts to drive sales through weak demand as analysts post ever-lower predictions for growth. The outlook for yearly GDP growth is for about 8%, a number that is far out of reach for most of the world’s economy, and yet represents China’s weakest gain in 13 years.
The stringent monetary measures adopted by Beijing have been working, perhaps too much. Inflation is now under control, at 3,4% per annum, a comforting sign for those who feared that uncontrolled inflation would undermine social harmony. The time is right for a change in policy, using the traditional tools. Infrastructure projects will be commissioned and facilitated by cash injections, local governments will have easier access to credit and funding, and the banks will get relief through lower reserve obligations, freeing up capital for investors. Businesses will get tax rebates, as well as incentives to purchase durable goods.
Wen knows very well that his aspirations likely to converge: healthy economic growth is a precondition for launching the reforms. China’s balance sheets are fundamentally in order, and prosperity through expansion is the lubricant to avoid internal frictions. Any changes that are made will have an impact on vested interests, both political and personal. Wen’s call for transparency, democracy, and competence will inevitably run up against the powerful lobbies that are reluctant to allow any modification of their status. The next CCP Congress – where the ruling body for the next ten years will be selected- will be far easier to control if the economy is expanding; clearing out the losers will be much less painful with a strong economy as backup.