Less than three months ago, Beijing announced a new 7.5% growth target, signaling its willingness to tolerate a slowdown for the sake of necessary reforms. Those were the days. Over the past week it has become clear that China's planners have loosened their purse strings, although not to the extent beleaguered investors had hoped. Apparently the Communist Party is losing its nerve.
Today's stimulus is a pale shade of the 2008 version. The government is expected to sanction projects worth up to two trillion yuan ($315 billion). That compares to the estimated 20 trillion yuan in central- and local-government spending and politically allocated bank credit Beijing used to keep China from succumbing to the global crisis four years ago.
The National Development and Reform Commission has accelerated approval of infrastructure projects, and the government will invest in several favored industriesâ€"such as pouring $20 billion into new steel plants despite current chronic overcapacity in the steel industry. Local governments are expected to adopt measures such as subsidies and tax credits for property buyers to buoy a sinking real-estate market. In a sure sign of desperation, Beijing also plans to revive its cash-for-clunkers program to encourage people to trade in old cars for new ones, and it will roll out subsidies to buy household appliances.
Beijing's desire to do something is understandable, given a steady flow of bad news. Industrial production is growing at the slowest pace in three years and HSBC's survey of business confidence finds managers increasingly pessimistic. Electricity consumption, a reliable proxy for more easily fudged growth numbers, has been flat. Exports face uncertainty in both a tottering Europe and a sluggish U.S. With a once-a-decade leadership transition due later this year, there is less appetite than usual in the government for disruptive economic change.
Tiffany stained-glass window of St. Augustine, in the Lightner Museum, St. Augustine, Florida.
But with the economy still struggling to absorb the last stimulus, this one is likely to have a smaller marginal effect even than its smaller size might suggest. Neither spending plan addresses the basic imbalance in favor of investment and exports and against consumption. You can gain only so much from building ever more roads, bridges, airports and hydroelectric plants if there isn't sufficient underlying economic activity to create users for those public works.
This is exactly why the 2008 stimulus is now regarded as a waste of money, even among some Chinese leaders. That building binge, which caused investment to surge to 49% of GDP as of last year, has never produced the knock-on economic activity boosters in China and the West predicted. Instead, white elephant projects sit idle. Bad loans accumulate on the books of the banks that financed the construction as anticipated revenue streams for the borrowers (whether from corporate profits or in the form of increased tax revenues spurred by growth) don't materialize.
Now Beijing is hoping to do a little bit more of the same. It's telling that even those elements of the stimulus program that look like they're targeted at boosting household consumption have an industrial-policy edge: Beijing is trying to steer yuan to manufactured goods such as autos, washers and energy-efficient lighting whose producers have previously benefited from incentives.
Wages did rise slightly as a share of GDP last year, an encouraging sign. But there is little talk of raising bank deposit rates or other steps that would distribute money away from the government-industrial complex into individual hands. Doing so would simply be too difficult politically on the eve of a leadership transition. Beijing can't afford the slower growth that would inevitably result during a genuine rebalancing. And the regime is too dependent on the support of state-owned enterprises and others that benefit from the current system.
Staying the course, including the mild stimulus, might work for now if "working" means producing a respectable GDP growth figure. By definition, government spending and investment are part of output. But given the mothballs already accumulating on the previous stimulus's projects, no one should expect the latest round to induce durable growth over the longer term. The Party's goal seems to be to keep the headline growth number sufficiently high to quell popular dissatisfaction for the rest of the year.
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This is a teachable moment for the West's China-besotted commentators. The country's leaders too often win kudos for their "far sightedness" in setting economic policyâ€"their ability to build roads and bridges, and the alleged care with which they formulate orderly central plans. The current slowdown exposes how false this view is. Confronted with a choice between short-term political gain and longer-term economic progress, China's leaders continue to take the easy way out.
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