Q+A: Is China’s $1.5 trillion plan money well spent?

BEIJING (BestGrowthStock) – – China is working on plans to spur up to $1.5 trillion of investment over five years in seven strategic industries, from alternative energy to biotechnology.

Here are some questions and answers about the economic implications of the plans:

WHY WOULD CHINA DO THIS?

The vast spending program would be integral to the government’s ambition to turn China into a top maker of high-tech, environmentally friendly products and move it away from its current focus on cheap manufactured goods and energy-intensive, polluting factories.

Beijing has made no secret of this goal. Since last year, the government has talked about promoting strategic industries to lay a foundation for the next phase of economic development.

In September, the State Council, China’s cabinet, named the seven industries, and said it would encourage banks and private investors to finance their growth. It reaffirmed this in October in its five-year plan for 2011-2015, a key policy blueprint.

A large-scale investment plan would focus the minds of officials and businesses and ensure that the powerful machinery of the state-owned banking system is geared toward the government’s strategic objectives.

CAN CHINA AFFORD SUCH INVESTMENT?

At 2 trillion yuan ($300 billion) a year, the investment in the strategic industries would consume nearly a quarter of the central government’s budget.

But Beijing won’t put up so much cash itself. Rather, it will marshal financial support from all corners of the economy: from local governments, banks, firms and private investors.

The stimulus plan launched in 2008 to counter the global financial crisis offers a rough model. Of the headline 4 trillion yuan total, the central government only directly delivered 30 percent.

Once all of these players are on board, China’s spending power is greatly magnified.

Looked at on an economy-wide basis, the annual spending on the strategic industries would represent about 5 percent of gross domestic product. That would be hefty but feasible.

WILL THE INVESTMENT BE WASTED?

Possibly. The seven target industries account for 2 percent of GDP now and the government has said that it wants them to generate 8 percent of the total by 2015.

In other words, the government would be spending nearly 5 percent of GDP to get 6 percent of GDP — a paltry rate of return.

There is also scope for waste on a sector-specific level. One focus is alternative energy, but the government has already warned of overcapacity in equipment production for the wind and solar power industries.

Nevertheless, the final investment figure might fall well short of the 10 trillion yuan under discussion. And double-counting could also inflate the total — for example, the government has already vowed to spend 5 trillion yuan on new energy over the next decade.

WHAT ELSE CAN CHINA DO?

Beyond lavishing money on the seven sectors, China has a number of buttons it can push to foster their development.

A more comprehensive industrial policy would include preferential tax rates and lower utility costs for companies in the target sectors.

China would also go a long way to restructuring its economy by enacting reforms that raise the prices of energy, land and capital, which until now have acted as implicit subsidies for polluting industries and heavy manufacturing.

The Chinese government has been successful in directing a tide of cash toward the large-scale construction of infrastructure. Promoting innovation in highly sophisticated and unproven industries will require more finesse.

($1=6.658 Yuan)

(Reporting by Simon Rabinovitch, Editing by Don Durfee and Neil Fullick)

Q+A: Is China’s $1.5 trillion plan money well spent?