Yu Yongding: China’s Stimulus Shows the Problem of Success
Yu Yongding is an academician with Chinese Academy of Social Sciences and a former member of the monetary policy committee of the Chinese central bank. He writes on the Financial Times:
To maintain decent growth and avoid massive unemployment, the Chinese government was left with no option but to replace flagging external demand by domestic demand. But in the short run it is difficult to stimulate domestic consumption; investment demand became the only alternative. As a result of the stimulus package, the growth rate of fixed asset investment hit 36 per cent year-on-year in the first half of 2009, and China’s investment rate may have surpassed 50 per cent of GDP.
The government knows very well that the economy has been suffering from overcapacity. This is why government-financed investment in the stimulus package is concentrated in infrastructure, rather than new factories. However, there are still problems with an investment-centred expansionary fiscal policy. Due to the hasty and under-supervised implementation, waste in infrastructure construction is ubiquitous, and the prospective returns of this big push into infrastructure are less than promising.
More resources should be used in building a decent social safety network, so household consumption can play a more important role in driving economic growth. Government spending should be conducive to private investment and help the development of small and medium-sized enterprises, but many local governments are squeezing these businesses hard to compensate for falling tax revenues.