There’s no longer much debate on the short-term effectiveness of China’s stimulus strategy this year. Twelve months ago, economists were busy cutting back their expectations for China’s GDP growth in 2009; now, many are stumbling over each other to raise their forecasts back to 8% and beyond. In addition to its direct impact on the economy, the stimulus appears to have made some headway toward the much fuzzier goal of boosting domestic confidence in the economy.
The longer-term question remains more problematic. Many observers who supported the stimulus and a loose monetary policy did so with the understanding that these were necessary temporary measures to keep the economy going at a time of collapsing external demand and domestic uncertainty. They presumed that with the year drawing to a close, Beijing would wrap up its stimulus spending and, over the coming months, gradually tighten the monetary environment. To not do so, the argument goes, is to invite asset bubbles and overcapacity.
The Politburo has other ideas. After meeting on Friday to discuss macro policy for 2010, it decided that the way forward is to "maintain the continuity and stability of economic policies, and continue to implement the proactive fiscal policy and loose monetary policy." The stimulus and the relatively easy money will continue.
Before giving into asset-bubble panic, it’s important to note that the Politburo took care to say it would enhance the "flexibility" of economic policy next year. Beijing is as aware as external observers of the dangers of too-loose monetary policy and misallocated investment, and reserves the right to clamp down if things get out of hand.
Clearly, however, the central government continues to believe that there is some way to go before the training wheels can come off. We may have 8%-plus growth this year, but the prospects for growth in the medium- and long-term remain clouded.
By maintaining its current approach, Beijing will comfort those worried about the ability of private investment to pick up where stimulus spending left off and avoid damaging sell-offs by panicked investors. At the same time, as recent comments by the China Banking Regulatory Commission on capital adequacy ratios showed, it can – and will continue to – use other instruments to rein in the worst excesses. Taken as a whole, this approach is designed to turn off the stimulus and tighten monetary policy as gently as possible to avoid major shocks to the economy.
Will it work? Maybe. There are still real worries, including the risk of non-performing loans a few years down the road, and chronic overcapacity in sectors like steel; continued government-directed stimulus spending and easy access to credit aren’t likely to help. However, it would be a mistake to see the Politburo’s statement as anything other than a reasonable and measured approach to a complex problem.