Much of the debate surrounding this year’s National People’s Congress has come not from assurances of economic confidence, but from what was left unsaid.
Premier Wen Jiabao did not announce additional economic stimulus measures, or even details on how money already committed would be spent.
Many market watchers have seen the lack of new stimulus measures as a statement of strength: China announced no new spending because it needs none.Some signs already seem to indicate that the economy bottomed out in the fourth quarter. Property sales have seen a rebound, retail sales are strong and manufacturing data is getting less bad. In popping the property bubble and forcing inefficient manufacturers out of business, the slowdown has also hastened necessary adjustments. It’s bitter medicine, but better than the alternative.
There is another possibility. Wen did not announce new stimulus precisely because the downturn is not over, and won’t be for some time. More government spending might keep the economy going for now, but could lead to over-investment and exacerbate overcapacity.
As is usually the case, the real reason for the silence – and the best course of action – probably lies somewhere in between these extremes. Giving up a few percentage points of growth this year in exchange for a more sustainable economic path in the future is a good trade.
The trick for Beijing is ensuring the money that is spent flows to the right places. Bank loans, and central and local government funding are at the heart of China’s fixed-asset investment this year. Government investment during a downturn is supposed to bridge the gap while the private sector rights itself.
At the same time, with any explosion in credit growth there is a danger that sustainability will suffer. The desire to preserve jobs may come at the cost of consolidation essential to an industry’s long-term health. Building roads where there are none or providing social services where they are lacking can bear considerable fruit, but there is a lag.
The more money Beijing makes available, the more interested parties will look for a slice of the action. So spend, but spend wisely.