China seen launching massive stimulus via provinces. Question: Who'll pay for it? - MarketWatch (blog)

The 829 billion yuan ($130 billion) investment plan announced by China’s Changsha city on Wednesday is drawing comparisons with the 4 trillion yuan stimulus Beijing announced in November 2008, effectively setting in motion a recovery from the depths of the global financial crisis. Read more about Changsha’s spending plan.

Reuters

The most obvious difference between the two packages is the approach. The 2008 crisis stimulus was announced by the central government. This time, local authorities are seen spearheading it, with Beijing’s blessing.

On Wednesday, the same day Changsha unveiled its 195 investment projects, China’s State Council approved a plan to promote the country’s relatively under-developed central region, comprising six provinces including Hunan, of which Changsha is the capital. The plan for the six provinces is of “strategic importance in China’s regional development layout,” according to a report from the state-owned Xinhua news service. See Hunan and Changsha in this map.

“In our view, this is the beginning of a new wave of fiscal stimulus led by China’s local governments, in response to the recent green light given by Premier Wen [Jiabao] to promote investment and expand employment, in order to stimulate the economy,” Mizuho Securities economists wrote in a report. “We expect Changsha, Nanjing and Ningbo to be the start of a wave of nationwide stimulus packages, with more announcements from other local governments to come,” they added.

There are no indications yet on the size of the investment planned by other provinces. But if the other five in the central region also announce similar sized plans as Hunan’s Changsha, the region’s total layout could be of the order of nearly 5 trillion yuan. At that size, it’ll be larger than the 2008 stimulus in absolute numbers, but not in terms of GDP, as China is a much larger economy now than during the financial crisis.

Barclays economists led by Jian Chang said Changsha’s announcement was positive news for China’s growth recovery in the second half of the year, “although we continue to believe that no massive fiscal stimulus should be expected.”

They pointed out that while China’s top leadership is expected to change only next year, “local governments have largely completed their leadership transitions, with new heads already in office,” and that those new leaders would “probably like to compete for resources from the central government and boost local growth, especially now as local economies face increasing downward pressures.”

Credit Suisse economists appeared skeptical. They said it has “become habitual” for the government to announce regional development plans in recent years, and for local governments to also come out with a lot of “grand” investment projects.

“However, the bottom line is always not what the local government wants, but whether they can get the money to fulfill their dreams. In 2009, they were successful as banks were opening their tab freely, and land sales looked good,” Credit Suisse said in the report.

But this time around, banks are becoming cautious and will be “less generous, no matter what the government’s intention is,” they said. Also, local governments’ land sales revenue is weaker, as are their tax proceeds, due to the economic slowdown, Credit Suisse added.

“There will be no 2009 repeat again,” they added.

What do markets think?

In November 2008, the Shanghai Composite jumped 7.3% on the first trading day after the State Council’s spending plans were announced, on a Sunday.

On Thursday, or a day after Changsha’s announcement, however, the index fell 0.5%. Even on Friday, the Shanghai Composite was up just 0.1% by noon, under-performing regional markets that were in rally mode.

â€" V. Phani Kumar