China stimulus unnecessary, risks long-term damage

BEIJING (Reuters) - China does not need massive fiscal stimulus to stabilize growth and calm investors fretting that the global economy may slip back into a similar crisis as 2008-2009, top policy advisers said on Wednesday.

An employee inspects the interior of a newly-made tyre with a flashlight at a tyre factory in Hangzhou, Zhejiang province May 29, 2012. REUTERS/Lang Lang

Even though China’s economic growth is expected to ease this year to its weakest pace in 13 years, aggressive spending now could do longer-term harm, they said.

“I don’t think we’re back in that kind of acute crisis phase,” Richard Boucher, deputy secretary general of the Paris-based Organisation for Economic Co-operation and Development (OECD), told Reuters.

Boucher’s is the latest voice to play down the need for a massive stimulus program of the sort unleashed by Beijing at the height of the global economic crisis.

Investors have speculated wildly this week about potential stimulus from China, looking to the biggest driver of global growth as Europe’s deepening debt crisis erodes market confidence in the health of the world economy.

Many traders now see parallels to the 2008-09 crisis - when the world’s banks lost trust in each other, the international financial system nearly came undone and global trade ground to a halt - especially as more evidence emerges of the slowdown in China’s economy.

The crisis saw Beijing unveil a 4 trillion yuan ($635 billion) stimulus program to fight a downturn that cost 20 million Chinese jobs in a matter of months. The stimulus helped underpin investor faith in the international policy response to solve the crisis.

Expectations of fresh Chinese stimulus have been fuelled by government steps in the past two weeks to fast track some infrastructure and industrial projects, which economists estimate to be worth around 1 trillion yuan.

Premier Wen Jiabao was quoted on a government website on May 23 saying that “downward economic pressure is increasing.”

Boucher - deputy head of the organisation that bills itself as the global policy think-tank to the world’s most important economies and in Beijing for a conference on international trade - said China had ample policy tools at its disposal without resorting to fiscal stimulus.

“It is not just a question of money,” Boucher said. “The Chinese authorities have a whole variety of tools to use to stabilize the right level of growth... I think signs that Chinese growth is stabilizing at a steadier level, a more sustainable level, would be good for everybody.”


Vice Premier Li Keqiang said on Wednesday that China should rely on domestic demand and structural reforms to support the economy, which faces growing downward pressures.

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“We must stick to the long-term strategy of stimulating domestic demand in order to maintain stable and relatively fast economic growth. It is also an important step to reform our economic structure,” state radio cited Li, widely seen as China’s premier-in-waiting, as saying.

China’s leaders have repeatedly said they would use a period of anticipated slower growth in 2012 to carry out structural shifts, including efforts to wean the economy off dependence on external demand and investment spending.

Beijing in March lowered the country’s official growth target to 7.5 percent for this year from 8 percent previously. It has a target of 7 percent on average over the five years to 2015. The most recent Reuters poll produced a consensus forecast for 2012 growth of 8.2 percent.

Such growth is way above an ill-defined “hard landing” scenario that investors had largely dismissed by the end of March, but which has begun to creep back into the consciousness of markets after weaker-than-expected April data.

China’s annual economic growth is expected by analysts to fall to 7.9 percent in the second quarter, the first dip below 8 percent since 2009.

But slowing growth alone does not imply a hard landing, said Xia Bin, head of the financial research institute at the cabinet’s think-tank, the Development Research Centre.

Xia, who was a member of the central bank’s monetary policy committee until March, said a hard landing would bring a sharp rise in both banking sector risks and unemployment, posing a threat to social stability.

In contrast to the global financial crisis, China’s labor today is tight as firms struggle to fill vacancies. Non-performing bank loans are around 1.1 percent - far below international averages.

Meanwhile there is room for the central bank to cut lending rates to help deal with the risks to growth and corporate profits but excessive policy action should be avoided, Xia said.

“Americans and Europeans like it. Investors like it because they want to speculate on stocks. The whole world is hoping China will relax policy,” Xia told Reuters.

“We will fall into a trap if we do. We will not be that stupid,” Xia said, adding that the government should only stimulate economic growth in a “balanced and modest” way, while forging ahead with structural reforms to sustain growth over the longer term.

With that in mind, China’s cabinet on Wednesday approved a blueprint to promote seven strategic industries by 2015, including next-generation information technology, biotech, industrial materials and advanced equipment manufacturing.


China’s 2009-10 stimulus program sparked a wave of speculative real estate development, lifting home prices way out of reach of many middle class Chinese. It drove inflation to a three-year high and saw local governments build a 10.7 trillion yuan mountain of debt.

Beijing has only just brought inflation under control, helping explain why growth is being sacrificed short term. Analysts cite a two-year long program of property curbs as the main reason why China’s economic growth in 2012 will be the slowest since 1999.

Boucher and Xia echoed a chorus of commentary from top Chinese academics in leading state-backed newspapers on Wednesday that Beijing should spur growth, but shun stimulus.

Earlier this week, an official at China’s top economic planning agency, the National Development and Reform Commission (NDRC), said large-scale economic stimulus was unlikely.

An article published on the website of the official Xinhua news agency said China had no plan to repeat the powerful stimulus measures used during the global crisis in 2008.

“The Chinese government’s intention is very obvious: It will not unveil another massive stimulus plan to stimulate economic growth,” the Xinhua article said, without citing sources. “Current policies to stabilize growth will not repeat the old way of stimulating growth three years ago.”

It was not clear if the article, which also cited analysts, represents official thinking - Beijing usually publishes straight-forward commentaries, not analyses, when it wants to explain its stance.

But the story was in line with the mainstream view among Chinese policy advisers that Beijing should avoid massive stimulus that would reduce the efficiency of economic growth and exacerbate overcapacity in some industries.

Chen Bingcai, a professor at the National Academy of Governance, said China must not overly expand investment and sacrifice quality growth for high growth. Chen’s school teaches and trains many senior leaders of the central government.

“If Beijing returns to an investment boom again, the previous call of adjusting the economic structure would turn out to be nothing but empty talk,” the official China Securities Journal cited Chen as saying.

Additional reporting by Aileen Wang and Langi Chiang; Editing by Neil Fullick