China's `New Normal' Growth Model Is Starting to Get Expensive

The Cost of Keeping China's Economy on Target
  • $236 billion spent boosting stocks, reserves down $286 billion
  • Mizuho sees fixed asset investment of $1.6 trillion in 2-3 yrs

When Premier Li Keqiang took the stage Thursday at the World Economic Forum’s “Summer Davos” meeting in Dalian, he told business leaders that although China faces challenges, growth is on track and fundamentals remain sound.

The upbeat message is all part of a ‘New Normal’ narrative from China’s leadership as the economy transitions from relying on heavy industry and debt to one driven by consumption and services. What Li didn’t mention was the spiraling bill associated with keeping the economy on course to hit the Communist Party’s growth target of about 7 percent for this year.

From building bridges and highways to shoring up the nation’s currency and stock markets, China is rolling out hundreds of billions of dollars in its biggest stimulus since the package that followed the 2008 global financial crisis. More spending is coming, with the finance ministry this week urging an acceleration of projects and promising to cut fees and taxes for companies, while provinces are taking their own steps to support growth.

“Beijing has turned on the taps, lifting spending on everything from infrastru‎cture to public services,” said Frederic Neumann, co-head of Asian economic research at HSBC Holdings Plc in Hong Kong. The nation’s authorities “cannot be accused of sitting idly by as growth decelerates, with measures announced year-to-date amounting to substantial policy support,” he said.

The world’s second-largest economy is growing at its slowest pace in 25 years, forcing the central bank to cut interest rates five times since November and funnel credit to local governments to finance new construction.

Estimates vary on the overall size of spending given the difficulty in netting out new expenditure and money that would have been spent anyway.

Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong, expects the stimulus package to be as large as the one rolled out in 2009 and 2010, with fixed asset investment of up to 10 trillion yuan ($1.57 trillion) over the next two to three years.

Policy Support

The policy support is taking on many guises: The government has spent 1.5 trillion yuan trying to shore up slumping stock prices since a rout that began in June, according to Goldman Sachs Group Inc. That’s about half what the U.S. government spent on its financial crisis bailout program, the Troubled Asset Relief Program. The Shanghai Composite Index index was 0.3 percent higher at 10:50 a.m. local time.

To fund infrastructure projects and create jobs, authorities in Beijing are planning at least 1 trillion yuan in bonds, and potentially a multiple of that. The central bank has also put $48 billion into China Development Bank Corp. and $45 billion into the Export-Import Bank of China as part of the plan to fund infrastructure.

Airports, subways, bridges, railways and water projects are among the approved projects by authorities since May, according to Mizuho. Provincial efforts include Shandong’s announcement it will buy small and medium-sized residential properties and convert them into public rental homes.

Reserves Fall

Then there’s the currency. Foreign exchange reserves fell by a record $93.9 billion last month as the central bank sold dollars to support the yuan after changing the exchange rate regime on Aug. 11 to allow the market to play a bigger role in setting its value. That move triggered the currency’s biggest loss in two decades, forcing the government to intervene to prop it up.

The list doesn’t factor in a government-backed debt swap underway for provincial authorities, extra savings that can be released by banks as the People’s Bank of China lowers lenders’ required reserve ratio.

Measures aren’t yet on the scale of the 2008-2010 binge, which left a debt overhang that’s now dragging on growth. Li on Thursday reiterated there hadn’t been spending on that scale and spoke of the balance between counter-cyclical spending and structural reform as akin to playing Chinese chess.

“There’s been no equivalent of the 4 trillion yuan announcement that heralded the 2008 stimulus” said Bloomberg economist Tom Orlik. “But if you add up the monetary, fiscal, stock market and FX interventions, China has been burning a lot of cash to keep growth and markets stable,” he said.

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