While China’s central government is reluctant to start a stimulus programme comparable to the previous RMB4 trillion one, and despite the fact that the previous massive stimulus is widely regarded as a mistake, local governments are considering stimulus like last time.
Since Premier Wen put growth back to the top priority, while stopping short of massive stimulus, many little things have happened, ranging from plans to bring future investment forward to cutting interest rates twice. Now, local governments are proposing some massive stimulus on their own.
International Finance News has a summary of what kind of growth stabilising measures local governments are considering. For instance, Ningbo and Nanjing have announced plans to stimulate consumption and rebalance their economic structures. Meanwhile, Guizhou will announce plans to develop ecotourism which may include some RMB3 trillion of investment if implemented in full (we have no idea why such plans require RMB3 trillion, we speculate that they want to clone dinosaurs *). Last week, I mentioned that the Changsha government has an investment plan that amounted to 147% of the city’s GDP if implemented in full.
Of course, no one would believe that some of these massive plans will have any chance to be implement in full (local governments routinely overstate their plans when they announce them). The RMB3 trillion investment programme by Guizhou, for instance, sounds totally unrealistic, especially when you consider that the planned RMB4 trillion stimulus last time was supposed to be spent throughout the country while this one is planned for a single province. Changsha’s plan is also extremely large compared to the city’s economy.
Some commentators and economists within China have already raised their objections to such plans, as they believe a massive investment-led stimulus is the last thing China needs. This is consistent with our reading of the general opinion within the country that the last massive stimulus was a huge mistake and should not be repeated. On top of the general concern that China should not stimulate like last time, the big question being asked everywhere focuses on financing, as many of these local governments clearly do not have enough financial resources to pay for these programmes without a massive increase in borrowing.
However, as we mentioned before, financing is not a major concern as long as the central government actually approves some of these outrageous plans. As the government can direct the state-dominated banking sector to lend to areas they judge appropriate, as long as the central government is willing to see a so-called “RMB4 trillion version 2.0”, albeit at a state level, these plans could get financing. Indeed, proposals have already been made to banks, recommending lending to local governments and their financing vehicles in order to relieve their financial pressures.
So, the key question is not financing. Rather, it is whether the central government would really like to see massive stimulus. The answer is not clear. I can see the rationale for the government, particularly at the local and municipal levels, to reflate the economy, and that is why we have seen the real estate market warming up after “fine-tuning” of policy. On the other hand, the central government has repeatedly reiterated its “determination” to curb home prices and not to repeat the massive stimulus.
* That was a joke, of course