Stimulus very different from 2008

Program brings little cheer to cash-strapped local governments

Never have economists been so polarized in their views about China.

Since the beginning of the year, many of them have been talking about the country's coming Minsky moment, or a sudden collapse in the value of assets. Others are ruling out that possibility.

Some say government stimulus, like the one in late 2008, led by the central government's 4-trillion-yuan ($650 billion; 470 billion euros) commitment, would benefit the economy. Others say it wouldn't.

The market has been all the more divided since a new government investment program was announced at a State Council executive meeting in the first week of April.

Some welcomed the so-called mini-stimulus as the shot in the arm the economy badly needed. Others criticized it as a sign of Beijing succumbing to the local governments' pestering for easy credit, and of the leaders abandoning their commitment to reform.

However, all signs in Beijing suggest that China can neither expect to boost its growth rate to the pre-2008 level nor, due to its financial health, dole out large amounts of credit to struggling industries, as it did after 2008.

There isn't as much demand, both at home and abroad, for the country's already excessive manufacturing capacity. There is no point in using financial stimulus to build still more of the same capacity and to produce still more of the same goods, as an article by Cai Fang, one of China's leading economists and demographers, recently pointed out.

This is where the recently announced mini-stimulus is different from the 4-trillion-yuan stimulus plan launched at the end of 2008. The bigger previous stimulus was designed to primarily bail out large state-owned enterprises, some of which even used some of the easy credit they received to relend it to smaller companies to earn interest. Many small enterprises were denied any benefit from what was meant to be an anti-crisis contingency package and were squeezed out of the market instead.

In contrast, the mini-stimulus of 2014 contains no favors for SOEs. It consists of three main components - building more housing units for the urban poor, cutting back taxes on small and micro enterprises, and committing additional investment to building railways while speeding up financial reform in that industry.

First, the stimulus committed 115.8 billion yuan, an increase of 14.3 percent from last year, to the construction of low-rental units and to improving housing conditions for residents of extremely shabby quarters. The money is expected to result in more than 4.7 million new residential units.

Second, very small enterprises don't pay much tax in the first place, although they can face untold extra-legal levies from various local government agencies.

Third, an additional 6,600 kilometers of new railways are to be built, 1,000 km more than last year's construction. Of the central government's provision of finance, 80 percent will be committed to railway lines in the impoverished central and western regions of the country.

As well, a railway development fund is to be set up, that will be worth 200 to 300 billion yuan, half of which will be raised through public issuance of bonds.

If the government's total spending on the above items amounts to 500 billion yuan, it is small fry compared with the massive stimulus in 2008, which featured the central government's 4 trillion yuan allocation and much more from local governments.

More importantly, the mini-stimulus practically promises no money, and no leniency on raising money, to all the local governments that are watching local real estate markets hopelessly decline in transactions and in price. Beijing is not helping them transform their cities into "world-class financial hubs" filled with large government blocks, crowded business districts and high-end shopping malls.

One can be sure that more than a few provincial and municipal officials were disappointed by Premier Li Keqiang's lack of sympathy for their high-flying economic ambitions. But no one is sure when they will learn to encourage local economic development in more innovative ways.