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Chinese provinces take action to boost economy

Publication Date : 10-08-2012


Amid worrying news that one in five businesses in the manufacturing hub of Guangdong lost money in the first half of this year, the local authorities are rushing in with 200 billion yuan (US$31.6 billion) in stimulus.

Guangzhou, the capital of the southern province, will launch almost 300 projects in the second half of the year to support enterprises and construction, the city's mayor Chen Jianhua announced.

He did not give details, but the National Business Daily reported on Tuesday that the investment spree could accelerate the building of more railroads, and perhaps support a proposed second airport in the city.

Guangzhou is the latest in a string of local governments across China to boost spending to fight against a slowdown.

While many pledge to reduce taxes to boost consumption and help private enterprises, as well as offer subsidies on cars and appliances, a large chunk of the funds is still expected to go towards building more bridges, railroads, hospitals and other infrastructure.

The moves suggest that a new round of stimulus, whose total size would match the 4 trillion yuan package in 2009 that helped China lead the world out of the global slowdown, is under way.

The previous effort had the central government's explicit blessing and partial funding. This time, the plans are being spearheaded by the local authorities, whose ability to fund their ambitious plans is in doubt.

As such, this so-called "local stimulus" has raised more concerns than cheer among analysts.

"Compared with the previous round of 4 trillion yuan in stimulus, which had the advantage of being systemically arranged and coordinated, this stimulus plan by the local authorities will inevitably be overshadowed by overlapping construction, overcapacity and increased financial risks," warned economics scholar Zhao Xiao. During the 2009 investment binge, more than 20 industries ended up with surplus capacity, especially in cement, iron and steel, he recalled.

A lending spree by state banks also spawned asset bubbles and sparked criticism of gross overreliance on state investment.

This time, with the global economic outlook so uncertain, it could be even harder for China to digest excess capacity, Xiao noted.

In the second quarter of this year, the world's No. 2 economy grew by 7.6 per cent, a three-year low, as exports shrank.

But Beijing has pledged to keep growth on an even keel, with Premier Wen Jiabao proclaiming last month that "what is important is to promote a reasonable growth in investment".

So amid pressure to ensure stability on all fronts ahead of a top leadership transition later this year, local officials are using investments as a quick-fix to boost confidence, growth and jobs.

Take Changsha, capital of central Hunan province. It launched a 829 billion yuan investment spree for 195 projects, including an airport and a subway, kicking off the bout of stimulus among local governments last month. At least six cities have since followed suit.

These range from Anhui in the east - which called for 81 major projects with planned investments of up to 45.7 billion yuan - to Guizhou in the south - which wants a 3,000 billion yuan investment binge to support tourism. Others, like Beijing and Shanghai, are said to be planning stimulus measures.

Actually, in the first half of this year, 26 out of China's 31 provinces and municipalities had already raised their level of investments. Guizhou - one of the poorest capital cities - led with a 58 per cent rise. So provinces like Guangdong are now playing catch-up. Its local government in Guangzhou invested just 27 billion yuan in the first half of the year and saw the province's GDP fall to 8.3 per cent - way below its full-year target of 11 per cent.

Still, analysts questioned whether local officials can really deliver on their grand plans.

Zhang Changchun, a director at a think-tank under China's economic planning body, has pointed out that this year's fiscal budget - which will cut the deficit by 150 billion yuan - has already been set. This would limit the ability of local governments, many of which are still laden with debt from the 2009 investments, to offer more stimulus this time.

But local officials such as Zhou Lianjun of the Changsha municipal government financing office insist that there is "no need to overreact to debt worries".

He told state media Xinhua that this stimulus is "necessary for... urban development". The 829 billion yuan would also be spread over five years, he added.

But this has in turn prompted analysts to argue that this "local stimulus" does not guarantee a recovery in China's GDP in the second half of the year.

"Although the 4 trillion face value of these plans is equivalent to 8 per cent of one year's GDP, the impact will spread over multiple years," Capital Economics analysts Wang Qinwei and Gareth Leather said in a research note.

"Indeed, many of the projects will take five to eight years to complete and not all will start immediately," they said.


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