On November 9, China launched a widely anticipated stimulus
program consisting of no less than 16 percent of China's annual
GDP, or $586 billion.This percentage is an eye-popping figure,
which is exactly the intended effect. In substance, the program is
largely a repackaging of previous measures designed to immediately
bolster domestic confidence and spin Chinese participation in the
upcoming G-20 global financial meetings.
Several of these previously disclosed measures include
- Rebuild after the Sichuan earthquake;
- Formally loosen lending restrictions on state banks that were
being ignored over the course of 2008; and chiefly,
- Enhance the nation's transportation network by spending
hundreds of billions of dollars over several years in what was
already a well-established program.
The State Council promises to rush forward $18 billion in
spending in the fourth quarter of this year. But total Chinese
investment in the third quarter alone was almost $700 billion.
The package is merely the culmination of a series of steps taken
over the previous nine months, measures enacted first to bolster
suffering domestic stocks and then to boost a sharply decelerating
domestic economy. These steps did not constitute even a small
surprise to anyone following the troubles of the Chinese economy,
but they may come as a shock to those counting on vigorous Chinese
growth to "save" the world from the global financial crisis.
Observers pointing to China's financial system as a model for how
the U.S. and others could have avoided the crisis will likewise be
The Chinese economy is in no position to meet the high
expectations that media headlines are creating for it and the
just-announced stimulus package is certainly not the fulfillment of
those expectations. Perhaps more important, the highly regulated
structure of the Chinese economy that some find appealing in light
of the current financial shock has proven to be a clear and painful
flaw-and absolutely not a model for the global economy.
Present Economic Weakness
China's cup is more than half full, but it is leaking quickly.
GDP growth has decelerated from a peak of over 12 percent last year
to a flat 9 percent in the third quarter of this year. While 9
percent GDP growth is still the envy of the world, this number
presents a rapid decline. And it will get worse. The official
purchasing manager's index is in uncharted waters: For the first
time in its brief history, it is signifying not just slower growth,
but an outright contraction. The data demonstrating this
contraction may not be entirely accurate but it does represent the
extent of the strain on manufacturing.
Finance is also under pressure. The bull run in the middle of
the decade gave way to a very nasty bear retreat almost a full year
before the global economic crunch. Stocks are down 70 percent from
their October 2007 peak, despite a series of attempts by the
Securities Regulatory Commission to bolster sentiment.
The situation with exports is similar to GDP: a still-excellent
performance but a downward trend. Export growth through three
quarters was at a six-year low-and this is before foreign demand
was blasted by the financial crisis.
Believers in Chinese resilience point to investment and
consumption. Investment will certainly go higher, but to what end?
Investment growth had already accelerated to 27 percent by the end
of the third quarter. China has been investing at a 20 percent
annual rate for six years and counting. It has long past the point
of investing in low-return projects and the question now is whether
this is a bubble with Chinese characteristics. Housing prices, for
example, are falling outright in major cities and real estate sales
have plummeted. Yet, even before the stimulus, real estate
investment growth was above 30 percent.
Consumption has been strong, but perhaps not as strong as widely
believed. Better than 20 percent gains in retail sales are welcome
news to both domestic and foreign companies but the fastest growing
component has been oil and oil products such as gasoline. Under
pressure from global crude costs, the People's Republic of China
(PRC) finally raised some domestic energy prices this year, forcing
consumers to spend even more.
Surprising Financial Weakness
There are also long-run challenges presented by China's
financial weakness. Imagine if the U.S. had $2.5 trillion in assets
untouched by the financial crisis, budget deficits, and similar
challenges. Now imagine the government insisting the money was not
available to address the nation's problems, but must be held
indefinitely in low-return foreign bonds. The money would be
rightly understood as criminally wasted, rather than a source of
strength. This is the case with China's gargantuan foreign exchange
It is true that the PRC is in possession of close to $2 trillion
in official reserves and perhaps as much as $500 billion more in
foreign currency held by ostensibly commercialized but state-owned
entities; Beijing has a lot of money to spend.
Chinese regulators, however, are naturally hesitant to approve
aggressive investment in struggling foreign companies after the
abject failure of high-profile acquisitions of stakes in companies
like Morgan Stanley. Further, passive investment of reserves in
response to ballooning American budget deficits was a major cause
of the financial crisis. It is difficult to see yet more liquidity
as more than a band-aid, even if the U.S. and other countries would
allow Chinese acquisitions of multiple, large corporations.
What would be better is if China could drive the world economy
forward as other engines are refitted. This does not refer to the
PRC boasting a high growth rate that is built in part on a trade
surplus drawing money from outside. China would be most helpful by
boosting its own imports, stimulating export industries overseas,
and naturally paying out some of the huge stock of reserves to
competitive companies around the world.
Reserves could be used to do this directly, of course, but the
new package does not include any direct spending on imports. This
is unlikely to occur-the PRC has always strongly defended the vast
majority of its domestic industry from the effect of competition
with foreign goods.
The knockout blow is that reserves cannot be used to finance the
announced stimulus or for any other internal use. Because the yuan
is not convertible, reserves cannot be spent domestically. Why
would Beijing adopt and maintain a system to bring in so much
wealth that cannot be used? Part of the explanation will be
familiar: It is intrinsic to protecting the competitiveness of
Another part, though, goes to the heart of reactions to the
financial crisis: China sees its heavily regulated and sheltered
banking system as too fragile to permit something as basic as
letting savers send their money overseas. Movement of the yuan must
therefore be very tightly controlled. As is now becoming clear,
tight financial restrictions have not protected the Chinese economy
from the global crisis. Moreover, they are a signal of fear and
weakness, hardly policies to emulate.
Derek Scissors, Ph.D., is
Research Fellow in Asia Economic Policy in the Asian Studies Center
at The Heritage Foundation.