Last week, Changsha, the capital city of Hunan, announced that they have held some sort of roadshow for banks on 25 July to promote RMB829.2 billion worth of investment projects. This followed yet another roadshow by the city of Changsha for state-owned enterprises held in Beijing last week. Some took that as a massive stimulus programme.
It is indeed massive. According to Nomura’s calculation, RMB829.2 billion represents some 147% of Changsha’s 2011 nominal GDP, making it sound totally surreal. Of course, it would be unreasonable to expect all 147% of GDP to be spent in one single year, and it could very well be the case that the local government overstated the number. The purpose of the roadshows is basically to ask state-owned enterprises to invest, and to ask banks to lend the money.
The big question to most so far appears to be on the financing of the projects. As local government finances worsen together with the economy and with banks now relatively cautious in lending, it does appear that this is the key constraint. But to be clear, should the central government and the People’s Bank of China decide that stimulating the economy with massive fiscal stimulus financed by borrowed money is the right thing to do, I am absolutely certain that they are able to get financing, one way or another. As I noted earlier, a proposal has been made to recommend banks to direct lending to local governments. Private capital will not be interested in investing, but state-owned banks could very well be forced to.
Thus the most important question I have in mind is not financing. As I have repeatedly mentioned, the last major round of stimulus (the RMB4 trillion one) has widely regarded as a mistake within China. While it did create a period of strong growth, it is feared that by repeating the stimulus now, the real estate market will heat up again and inflationary pressure will be back. Indeed, even some “fine-tuning” and rate cuts have been enough for the real estate market to warm up much again. As a result, no one seems to believe that a massive stimulus like last time will come any time soon (although we believe very massive stimulus will be needed to maintain high growth).
Thus the more important question we have in our mind is whether the central government would like to see all local governments implementing their own version of “RMB4 trillion” while the central government clearly does not want to. If the answer to that question is ‘yes’, then the problem of financing will go away immediately, and one can be excited about the short-term growth prospect as every province and city potentially announces their own crazy stimulus (while the long-term structural issues will be forgotten for a while).
If the answer is ‘no’, then don’t get excited.