Understanding the China Slowdown

The April numbers were terrible—and state spending is on the rise

A sure sign of Chinese concern about their economy is the flurry of announcements about growth. China must give “more priority to maintaining growth,” Premier Wen Jiabao said on May 20. “Key infrastructure projects” will be sped up, the State Council announced on May 23. “China is making all-out efforts to encourage private investment,” reported the official Xinhua News Agency on May 28.

More stimulus for China? The last program was launched just over three years ago. “Until recently, most officials felt there was no need to do more than push down gently on the accelerator,” wrote Mark Williams, chief Asia economist at consultants Capital Economics in a May 24 note. No longer. The economy expanded 8.1 percent in the first quarter.

Credit Suisse now expects China to grow at 7 percent or less this quarter. If Greece quits the euro and China fails to deliver on stimulus, the mainland’s growth could slow to 6.4 percent this year, warned local investment bank China International Capital on May 23.

The latest stimulus could cost 2 trillion yuan ($315 billion), estimates Credit Suisse. A plan to subsidize consumer purchases of energy-efficient appliances will soon kick in, and the planning agency has approved the expansion of airport projects in the provinces of Xinjiang, Chongqing, and Sichuan.

The Chinese seem aware that the last spending spree resulted in overbuilding. “The efforts for stabilizing growth will not repeat the old ways of three years ago,” Xinhua reported on May 29.

Some economists are skeptical. “There is already massive overcapacity. But they are saying everything is going to be fine,” says Patrick Chovanec, a business professor at Tsinghua University. “That’s because the government is going to spend lots of money. Think of the moral hazard there.”

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