- The Washington Times - Monday, November 17, 2008

BEIJING China’s $586 billion stimulus plan is turning out to look less impressive than it first appeared, with much of the money expected to come from localities and the central government still seeking to boost exports as an engine of growth.

In addition, China gave no indication Sunday - after a two-day financial summit in Washington - that it would contribute some of the $1.9 trillion in its reserves to an expanded international bailout fund.

The Washington summit was an “important and positive” step toward “the reform of the international financial structure,” Foreign Ministry spokesman Qin Gang said in a statement. It made no mention of possible bailout contributions, and a man who answered the phone at the ministry press office said he had no information.

Leaders from 21 nations, including China, and four international organizations attended the Washington summit.

With the meeting over, the ability of Chinese consumers to help the global economy on another front - by buying more imports - is likely to figure prominently as governments decide what to do next. Here, many analysts are pessimistic.

China, with its export-oriented economy and low internal demand, is in no position to save the world, said Morgan Stanley’s Asia chief, Stephen Roach.

The initial excitement that greeted the announcement of China’s planned investment of more than a half-trillion dollars in infrastructure and social-welfare programs has subsided amid estimates that up to half of the figure that grabbed the headlines had already been allocated and did not constitute new spending.

The package is still sizable, constituting 4 percent to 5 percent of gross domestic product, said Frank Gong, J.P. Morgan’s chief of China research and strategy.

But enthusiasm was further dampened by official admission that the central government would only be coughing up a quarter of the money, with the rest coming from local governments and state-owned enterprises.

Rather than obsessing over the sums, “it’s still the speed, not size, of the package that matters,” says Ben Simpfendorfer, China economist for Royal Bank of Scotland in Hong Kong.

If the plan cannot progress to concrete action quickly, it is possible that GDP growth will slip toward 5 percent in the first half of next year, he warned.

Comments made by Chinese Prime Minister Wen Jiabao last week reflected this concern. He told local governments not to “waste a single minute” in upping investment to achieve “steady and relatively fast” economic growth.

Mr. Wen has been forced into a huge departure from his urgings at China’s annual parliamentary session early this year, when he stressed the need for sustainability above blind investment.

“We must give priority to the quality, rather than speed, of development. The price paid for economic growth in terms of resource consumption and environmental pressure is too great,” he said in March.

In a further indication that the government thinks that now is not the time to pursue a more innovative growth model by moving away from its reliance on exports, China raised export-tax rebates on Wednesday for the third time since July to prop up its struggling manufacturing sector.

“While steps to support domestic Chinese demand help the world economy, steps by China - the country in the world with the largest current-account surplus and still quite rapid export growth - to keep its exports up don’t,” writes Brad Setser, an analyst with the Council on Foreign Relations, on his blog.

China’s surplus, long a cause of international trade tensions, reached a record $35.2 billion in October, up 20 percent from the September figure.

Some economists fear that increased investment in developing infrastructure does little to address the key question: How do you raise domestic consumption by persuading savers to part with their cash?

With the country’s national saving rate last year standing at 51.2 percent of GDP, the government is trying to increase social spending, particularly in the health and education sectors, to convince its people they no longer need such a wide financial safety net sitting in the bank.

Michael Pettis, an economics commentator and finance professor at Peking University, is “pessimistic” that the stimulus proposals can do the job. “This package is only useful to the extent that it boosts real demand, especially if it boosts household demand, but that doesn’t seem to be in the cards,” he said.

China’s stimulus plan is aimed at guaranteeing an economic growth rate of 9 percent per year for the next two years, Li Jianwei, an economist with the State Council’s Development Research Center, a think tank under the Cabinet, told the China Daily.

Mr. Roach, of Morgan Stanley, said that without the spending package, economic growth could have fallen to 6 percent in 2009. Now, he predicts that growth will just exceed 7 percent.

Analysts generally agree that if the growth rate dips below 8 percent, it could pose a serious threat to social stability.

However, the central government says it remains confident that despite its economy facing a “formidable challenge,” as a senior official said Friday, it can emerge from the storm relatively unscathed.

“The origin of the financial crisis is outside the country, and its impact on our financial system is limited. The fundamentals of our economy are still good,” National Development and Reform Commission Vice Chairman Mu Hong said.

“We have a market of 1.3 billion people, which has great potential, and we also have great potential to boost investment and consumption,” Mr. Mu said. “We still have large room to maneuver to ramp up domestic demand.”

At the Washington summit, China won the promise of a bigger role for developing countries in global finance.

China has been pushing for developing countries generally - and itself specifically - to have more influence at the International Monetary Fund and other global bodies.

Analysts say that might be Beijing’s price to later dip into its reserves and contribute money toward an IMF emergency loan fund for struggling countries.

Summit participants vowed Saturday at the conclusion of the two-day conference to cooperate more closely, keep a sharper eye out for potential problems and give bigger roles to fast-rising nations.

But the leaders avoided many of the harder details, leaving them to be worked out before their next summit, after President Bush is gone and President-elect Barack Obama is in the White House.

This article is based in part on wire service reports.


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