Care and maintenance of golden geese

China's government weathered the global recession with enviable growth rates. In the aftermath, it continues to apply cooling mechanisms to its breakneck economy. Amid fears of a double-dip global recession, these cooling mechanisms are coming under scrutiny and criticism.

Breakdown of the 2008 Chinese economic stimulus plan.
Image source: Economic Observer.

As the global recession hit in 2008, China's government authorized a stimulus plan totalling ¥4 trillion – roughly comparable to the U.S. stimulus package. More than half went to two fields: public infrastructure and disaster reconstruction following the 2008 Sichuan earthquake. The remainder went more or less equally into social welfare spending, technological advancement, and rural development, with a relatively small sum going to sustainable development and educational projects. The plan combined a mixture of central government funding and costs to be born by local and provincial governments.

The stimulus plan helped maintain healthy growth for China's economy throughout the global downturn, but it is nearing its end, with the central  government reining in bank lending with a hard limit by year's end, and acting to curb speculation in housing and mortgages. The 2010.07.17 Economist article Defanging China's growth indicates that the cooling policies have succeeded – growth has slowed from a rate of 11.9% in the first quarter 2010 to 10.3% in the second: still impressive, but allaying fears of an overheating economy.

The risks of such a slowdown are forwarded in an Op/Ed piece in the 2010.08.06 Financial Times, China needs slower, better growth by Yu Yongding. Firstly, there is a fear that China's economy could jeopardize the fragile global recovery if it stumbles – Yu dismisses this fear in the short term as unlikely, given that even a 9.1% growth in 2009 was a powerful sign amid global recession. His primary fear is that the heavy focus on curbing the housing boom, and the means to combat it (including discussions of taxing property capital gains – a first for China), have taken most of public policymakers' attention away from responsible oversight of infrastructure spending. Although housing is certainly the more socially sensitive topic causing greater public resentment, infrastructure spending was the recipient of the largest share of the stimulus funding. and bear long term consequences if it fails to meet similar gains in manufacturing: roads that lead nowhere collect no tolls.

The worst-case scenario Yu posits would be a 30% fall in house prices, and then only if the government fails to implement controls responsibly. This is unlikely, given the low debt of Chinese households and well-capitalized banks by government regulation. The more pressing long-term concerns involve the country's over-reliance on two fields: a) investment, which will eventually plateau out and risks deflation, and b) on exports, which have already encountered growing protectionist resistance owing to their sheer mass. Developing structural safeguards and improving quality over mere quantity remain key goals for the leadership according to Yu.

Both within China and outside, the effects of a Chinese slowdown are making themselves felt. Domestically, inflation grew above 3% in a 2010.08.12 FT report ("Chinese economy slows further"), even as factory gate inflation fell. The prevailing view is that the Chinese economy is undergoing a "controlled slowdown" rather than a double dip economy. Stockwise, the Chinese variances are affecting Asian stock prices in the Asia-Pacific index, the Shanghai Composite, Nikkei 225 Average, and Sydney S&P/ASX – with marked losses for Chinese property development companies, and drops for materials stocks in the S&P 500 in the U.S.

With prospects of a fall in housing prices triggering dissatisfaction among China's newly-anointed homeowner class, longterm concerns such as the friction in foreign markets and the unsustainability of export growth are likely to take a back seat in Chinese policymaking circles. Yu counsels engagement sooner rather than later – advising that a greater delay will result in a more painful adjustment.