BEIJING: China's forceful response to the global financial crisis did wonders for the economy at home and abroad, but the government now has its work cut out to keep the bill for the investment binge from swelling in size, according to Reuters on Tuesday, Nov 9.
Aside from the upfront costs, the worry is that there will be a resurgence in bad loans and inflation long after the two-year 4 trillion ($600 billion) stimulus package, announced on Nov. 9, 2008, draws to a close.
And there is an additional concern about less easily observable damage -- that the burst of spending may have exacerbated economic distortions that could undermine the country's long-term growth potential.
"There are definitely some side effects. The stimulus could create hidden perils for the economy in the long term," said Wang Hu, an economist at Shenyin & Wanguo Securities in Shanghai.
The biggest concerns reside in the banking system, because China's stimulus programme, unlike those in the United States and Europe, was mainly financed by credit.
Chinese banks doled out a record 9.6 trillion yuan ($1.4 trillion) in new loans in 2009, nearly double the total of a year earlier, and will lend another 7.5 trillion yuan or so this year.
"That is seen as the cloud hanging over the Chinese economy right now," said David Cohen, economist at Action Economics in Singapore.
Most of the bank loans ended up in the hands of cash-hungry local governments, which scrambled to kick off big-ticket infrastructure projects.
Risks for banks could rise as the government phases out its stimulus, putting pressure on local authorities trying to roll over existing loans.
The good news is that state-owned banks, anticipating trouble, have already made inroads in cleaning up their balance sheets.
China CONSTRUCTION [] Bank last week said it would raise 61.6 billion yuan in a deeply discounted rights offer. Bank of China has announced the terms for its rights issue. Industrial and Commercial Bank of China has also received approval to sell new shares.
INFLATION RISK
The flood of cash from the stimulus has fuelled concerns about a property bubble and could also put upward pressure on inflation more broadly, analysts say. They forecast that data on Thursday will show inflation reached 4 percent in October.
The government and the central bank are certainly not blind to these risks. At the end of last year, they declared that controlling inflationary expectations would be a priority in their management of the economy.
However, though they have begun to normalise monetary conditions, some analysts worry that they have moved too slowly.
Even the People's Bank of China noted in a recent report that the broad M2 measure of monetary growth, rising at a clip of 19 percent year on year, remained too strong.
"The lagging effect of the previous credit surge will continue for a while," it said.
China's central bank raised interest rates last month for the first time in nearly three years and there is market speculation another increase is around the corner. Yet annual economic growth has been slowing at the same time, to 9.6 percent in the third quarter from 11.9 percent in the first quarter.
"This could lead to a situation in which policy making will face a dilemma. On the one hand, economic growth needs a relatively loose environment, but rising inflation pressure may call for policy tightening," said Wang at Shenyin & Wanguo.
REVERSAL OF REFORMS?
A final concern about the stimulus is much harder to quantify, but serious nonetheless.
With the government's attention focused on the rush to invest over the past two years, there was some stalling of the reforms needed for the economy to shift towards a more consumption-based growth model, such as an experiment in rural land transfers.
Some bad habits may also have been revived.
The Asian Development Bank recently warned that over-investment in China could depress its productivity and lead to excess capacity in some industries. Investment alone contributed about 90 percent to China's growth in 2009.
And private firms, which over the past three decades had emerged as engines of growth and job creation, were squeezed in the course of the spending boom, with bank loans and public funds lavished on state-owned giants.
As the government withdraws the stimulus, Beijing needs the private sector to pick up the slack -- and private firms need the government to give them the space to thrive again.
"The government needs to continue to rely on market policy and not say it was successful in combating crisis 'so let's go back to old administrative ways'," said Tao Wang, chief China economist with UBS. "Some of the benefits that were earned from painful restructuring might get a bit reversed." - Reuters
Aside from the upfront costs, the worry is that there will be a resurgence in bad loans and inflation long after the two-year 4 trillion ($600 billion) stimulus package, announced on Nov. 9, 2008, draws to a close.
And there is an additional concern about less easily observable damage -- that the burst of spending may have exacerbated economic distortions that could undermine the country's long-term growth potential.
"There are definitely some side effects. The stimulus could create hidden perils for the economy in the long term," said Wang Hu, an economist at Shenyin & Wanguo Securities in Shanghai.
The biggest concerns reside in the banking system, because China's stimulus programme, unlike those in the United States and Europe, was mainly financed by credit.
Chinese banks doled out a record 9.6 trillion yuan ($1.4 trillion) in new loans in 2009, nearly double the total of a year earlier, and will lend another 7.5 trillion yuan or so this year.
"That is seen as the cloud hanging over the Chinese economy right now," said David Cohen, economist at Action Economics in Singapore.
Most of the bank loans ended up in the hands of cash-hungry local governments, which scrambled to kick off big-ticket infrastructure projects.
Risks for banks could rise as the government phases out its stimulus, putting pressure on local authorities trying to roll over existing loans.
The good news is that state-owned banks, anticipating trouble, have already made inroads in cleaning up their balance sheets.
China CONSTRUCTION [] Bank last week said it would raise 61.6 billion yuan in a deeply discounted rights offer. Bank of China has announced the terms for its rights issue. Industrial and Commercial Bank of China has also received approval to sell new shares.
INFLATION RISK
The flood of cash from the stimulus has fuelled concerns about a property bubble and could also put upward pressure on inflation more broadly, analysts say. They forecast that data on Thursday will show inflation reached 4 percent in October.
The government and the central bank are certainly not blind to these risks. At the end of last year, they declared that controlling inflationary expectations would be a priority in their management of the economy.
However, though they have begun to normalise monetary conditions, some analysts worry that they have moved too slowly.
Even the People's Bank of China noted in a recent report that the broad M2 measure of monetary growth, rising at a clip of 19 percent year on year, remained too strong.
"The lagging effect of the previous credit surge will continue for a while," it said.
China's central bank raised interest rates last month for the first time in nearly three years and there is market speculation another increase is around the corner. Yet annual economic growth has been slowing at the same time, to 9.6 percent in the third quarter from 11.9 percent in the first quarter.
"This could lead to a situation in which policy making will face a dilemma. On the one hand, economic growth needs a relatively loose environment, but rising inflation pressure may call for policy tightening," said Wang at Shenyin & Wanguo.
REVERSAL OF REFORMS?
A final concern about the stimulus is much harder to quantify, but serious nonetheless.
With the government's attention focused on the rush to invest over the past two years, there was some stalling of the reforms needed for the economy to shift towards a more consumption-based growth model, such as an experiment in rural land transfers.
Some bad habits may also have been revived.
The Asian Development Bank recently warned that over-investment in China could depress its productivity and lead to excess capacity in some industries. Investment alone contributed about 90 percent to China's growth in 2009.
And private firms, which over the past three decades had emerged as engines of growth and job creation, were squeezed in the course of the spending boom, with bank loans and public funds lavished on state-owned giants.
As the government withdraws the stimulus, Beijing needs the private sector to pick up the slack -- and private firms need the government to give them the space to thrive again.
"The government needs to continue to rely on market policy and not say it was successful in combating crisis 'so let's go back to old administrative ways'," said Tao Wang, chief China economist with UBS. "Some of the benefits that were earned from painful restructuring might get a bit reversed." - Reuters
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