The Wall Street Journal has an interesting interview with Justin Lin, the chief economist of the World Bank, who talks about China’s fiscal stimulus and the country’s "rebalancing" away from exports and towards having a strong domestic economy.
Asked why China’s fiscal stimulus has worked, Lin says: "The difference is that the stimulus in China has a very large leverage effect. From January to now, the growth in investment is 30pc higher than last year. If you look at the composition, part came from government fiscal stimulus, and a larger part came from expansion of bank lending.
"That is because China is a low-to-middle income country. China has a larger deficit in infrastructure. There is strong demand for those kinds of investments. That also creates jobs. Income increased, household employment increased, consumption increased. The US, though, is a high-income country so the scope of that type of investment is smaller. The fiscal stimulus does not come with large bank lending to support it, so the leverage effect in the U.S. is smaller"
This is all true, but is also fairly disingenuous. Mr Lin’s implication is that the stimulus programme stimulated companies into making further investments, which in turn created jobs etc.
What he doesn’t mention is that the banks started lending vast sums (7 trillion yuan) because they were told to by the government. And as soon as the government told them to stop, they stopped. Or that a lot of that "infrastructure investment" appears to have been wasted, or stolen.
Or that the leverage effect in the US is smaller because the US is not a command economy. In 2008, the biggest contributor to the Chinese economy was domestic investment, which made up 43.5pc of GDP. This year, domestic investment may make up 75pc of China’s economy. The Chinese state sector now owns more than two-thirds of the country’s fixed assets.
And, as Mr Lin points out, the system is deliberately rigged in a way that penalises small companies and, in the end, Chinese workers.
"In the financial sector, only big corporations and rich people have access to big banks and equity markets. Small agricultural households and small and medium-sized enterprises don’t get any financial services. (Without access to financial services, which could finance growth in these sectors) wage rates are depressed compared to the potential.
"That turned into a strategy for companies. If their wage rate is lower, their costs are lower. Companies which have access to financial services, their [capital] cost is relatively low, so they get subsidies there too. Common people put their money into the financial system and their earnings from it are relatively low. So they are subsidising big corporations. That’s the reason why big corporations have such high profit."