Chinese Cities Pledge to Boost Spending, but Will They?

The Wall Street Journal reports that a number of Chinese cities have rolled out large stimulus measures intended to boost slumping growth:

The city of Chongqing in China’s southwest called for investment of 1.5 trillion yuan ($237 billion) in seven key industries over the next three years, the state-run Xinhua news agency reported Monday.

Separately, Tianjin, a city next to Beijing, said it has “preliminarily” decided to move forward with a plan calling for investment of 1.5 trillion yuan over four years in 10 industrial sectors, ranging from the petroleum and chemical industry to the aviation and aerospace industry over the next four years, according to a report by the state-run Tianjin Daily posted on the Tianjin municipal government website on Tuesday.

The announcements follow a similar plan from Changsha, the capital of central China’s Hunan province, which last month unveiled plans for 829.2 billion yuan in investments.

The plans signal a growing appetite in China for government spending to help boost slowing economic growth. In the second quarter, China’s economy grew 7.6% from a year ago, the slowest rate since the global financial crisis, and more recent economic data suggest the slowdown will continue.

Despite the ambitious announcements, however, many analysts question whether Chongqing, Tianjin, and others will actually follow through on their proposed investments. From Reuters:

“You look at the size of some of these stimulus announcements and it is quite clear it is almost impossible they will all be brought to fruition,” said Alistair Thornton, an economist at IHS Global Insight.

Many analysts suspect the Tianjin plan and the others may be no more than verbal intervention to boost market confidence.

“To a large extent, they are just plans, or more detailed plans to five-year plans,” said Ting Lu, an economist at Bank of America-Merrill Lynch, referring to five-year economic blue-prints that China uses to chart its growth path.

“It’s not stimulus as defined by Wall Street.”

Indeed, many of the industries recently highlighted by local governments as areas of investment are those outlined in their five-year plans, making it hard to tell if recent investment pledges are indeed new.

And even if local governments were to attempt to bring-forward spending to lift economic growth, they will need approval from Beijing, as it controls the reins of bank lending and has the last say on any big project, said Lu.

Earlier this month, The Financial Times highlighted Changsha’s spending plan:

That the government of Changsha, a city of 7m, needs to prop up its economy at all might strike outside observers as bizarre. The city’s gross domestic product increased 12.9 per cent in the first half of this year, about two-thirds faster than the national growth rate. But the pace of growth was down from its 15.2 per cent average of the past five years. The drop to low double-digit growth has been sudden and unwelcome.

“Changsha has been among the fastest growing of the cities in central China, but it’s still small on a per capita basis and we want to catch up with the coastal areas. It’s like when you give a skinny man a nice meal. He still wants to eat more,” says Liu Fei, president of Hunan Fuli Investment Consultancy.

August 22, 2012 3:29 AM
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Categories: Economy