China’s widely praised stimulus plan has come under attack here at the “Summer Davos” meet from economists who say the massive government spending is aggravating imbalances in the giant economy.
China said on Friday that it was on track to meet its target of 8 percent economic growth this year the rate it says it needs to ward off social unrest thanks largely to the massive program of government cash handouts.
Beijing envisages 4 trillion yuan (US$590 billion) of investment over two years, including 1.18 trillion by the central government, mostly in infrastructure.
But professor Xu Xiaonian (許小年) of the China Europe International Business School in Shanghai said the strategy supports structural imbalances over-investment, surplus production capacity, and under-consumption while neglecting long-term objectives.
“China’s investment is already too strong. The US consumes too much but China consumes too little ... Millions are poured into infrastructure ... and distortion will continue to worsen,” Xu said at the third World Economic Forum in the northeastern city of Dalian, which ended on Saturday.
Public investment accounts for nearly 45 percent of China’s GDP, often benefitting industries already burdened with overcapacity, such as steel and cement, with consumption making up just 35 percent.
“China will lose steam and slow down. Eight percent growth seems easy to get but will soon become a luxury. Overcapacity is already a problem ... and everybody will feel the pinch,” Xu said. “The recovery is not sustainable; the government is extending credit like crazy.”
Besides the huge governmental stimulus package, commercial banks also have been lending money this year on a massive scale.
In the first half of the year, loans amounted to 7.37 trillion yuan, a line of credit that “is not sustainable,” said Stephen Roach, Asia chairman of Morgan Stanley.
The worry is not only that some of these loans are bad and might not be repaid, but also where the money is going into the real economy or into stock or property speculation.
“I would not call it recovery,” Xu said. “In Chinese, we have a saying about drinking poison to extinguish thirst. We need to say goodbye to past success and look for innovation.”
Analysts also said China needs other drivers for economic recovery once the government cash injections run out.
“We need to increase structural reform and reduce dependence on external demand,” said Yu Yongding (余永定) of China’s Academy of Social Sciences, a think tank.
Roach agreed.
“China needs more private consumption. Chinese households have a very high savings rate,” he said, citing one estimate that put the rate at 37 percent.
“The missing link is the social safety network,” he said. “The government has moved very slowly” to provide support for the country’s sick and elderly.”
But in Dalian, Chinese Premier Wen Jiabao (溫家寶) rejected these criticisms, citing government initiatives including a trial retirement program, spending on housing, health sector reform, and a massive three-year investment in the medical industry.
He said by the end of June the majority of government stimulus money was going into social programs including subsidized housing with less than 20 percent being spent on infrastructure.
“We are not only thinking of how to meet the [8 percent growth] target this year but also how to achieve long term economic growth,” he said.
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