Analysis: Sun sets on steamrollers as China stimulus plan ends

By Simon Rabinovitch and Zhou Xin

BEIJING (BestGrowthStock) – Every night after Beijing goes to sleep, a swarm of steamrollers, excavators and dump trucks takes over the city and embarks on a construction frenzy that lasts until dawn when office workers reclaim the streets.

Flattening ground for new roads, building bridges and digging subway tunnels, they are the moonlit manifestation of an investment surge that has multiplied throughout the vast country over the past two years. In doing so, they have propelled China past the global financial crisis and propped up the world economy, but have also left a murky trail of bad bank loans and wasteful investment in their wake.

They are the bearers of the stimulus package China launched on Nov 9, 2008. The two-year, 4 trillion yuan ($600 billion) investment program is now coming to a close — at the very time the United States, still struggling to kick-start its economy, is ramping up its monetary stimulus.

At its inception, there was much skepticism about whether China could carry off its plans. A quick return to double-digit growth erased those doubts.

As the program comes to an end, however, questions persist about the legacy of the spending binge, an experiment in gargantuan pump-priming that will shape the Chinese economy, for better or for worse, for years to come.

“If you take medicine, you will inevitably face side effects,” said Chen Quansheng, adviser to the State Council, or cabinet. “Every medicine is three parts poison.”

The verdict, in other words, is mixed.

“The main benefit of it was, of course, sustaining growth. It was helpful for employment and in preventing the crisis from happening in China,” said Wang Tao, chief China economist with UBS.

“But it also had costs,” she added. “The eventual size of the stimulus was probably too much, so you create future problems of non-performing loans and misallocation of assets.”

China’s official conclusion is thoroughly positive.

“The stimulus program accorded with China’s reality and was timely, forceful and effective,” Premier Wen Jiabao said in September. “It was the correct decision and is good for us, for later generations and for the world as a whole.”

AVOIDING WITHDRAWAL SYMPTOMS

The stimulus began with a bang.

Within days of its announcement on November 9, 2008, hotel rooms near the National Development and Reform Commission, China’s top planning agency, were booked up as local officials flocked to Beijing to seek fast-track funding for their pet projects.

Bank credit spiked. New loans tripled from October to November, and then kept rising until the middle of 2009.

The end of the stimulus will be much more gradual, alleviating worries that its withdrawal could hurt the Chinese economy or global markets.

For one thing, many of the biggest projects are long-term.

“Government investment and bank lending will remain strong next year and the year after, because it takes years to complete the ports, highways and railways that we started during the stimulus,” Chen said. “Otherwise, these would all end up half-finished.”

Even without the stimulus carry-over, the Chinese economy is at a stage where government investment remains a developmental requirement and not simply a counter-crisis tool.

Dong Tao, an economist with Credit Suisse, said infrastructure upgrades and social priorities from healthcare to education will continue to be showered with spending at the same time as China winds down its broader stimulus.

“Beijing is no longer in a panic situation,” he said. “The focus is shifting from the cyclical acceleration of stimulus to structural reform, which in my opinion is much more important.”

China has already been returning its monetary policy to a normal footing. It has clamped down on bank lending, raised bank reserve requirements four times this year and increased interest rates last month for the first time in nearly three years.

“We have to think about an exit strategy in the post-crisis era,” said Jia Kang, director of a research institute under the finance ministry. “We’ll do it in a gradual and quiet manner.”

Analysis: Sun sets on steamrollers as China stimulus plan ends