The case against more Chinese stimulus

Uneasy money ... Some Chinese steel traders are blaming the government’s last round of stimulus for their crippling debts. Photo: Reuters

Yet another round of weak Chinese economic data has observers calling for Beijing to unleash a fresh stimulus package, but a growing chorus of dissent suggests it would be a mistake for the government to pump more money into the world’s second biggest economy.

Many also believe the timing of the next change in Communist Party leadership – due before the end of the year – means that the Chinese government is unlikely to take steps that might commit its next leader to a particular course of action.

The debate over the outlook for China’s economy received a kick-along on Monday with the monthly release of the HSBC Purchasing Manager’s Index, which dropped to 47.6 in August, its lowest level since March 2009. The release followed China’s official PMI on Saturday, which fell to 49.2 in August from 50.1 in July, showing contraction for the first time in nine months.

Central Asset Investment’s chief investment officer, Eddie Tan, is among those suggesting that calls for stimulus are misguided.

“China is still growing around 7-8 per cent, so the last thing it needs is a very big stimulus package, especially on the fiscal stimulus side,” Tan told CNBC on Monday. “On the monetary side, there is more room to ease and maybe because of the politics it has been delayed a bit.”

China has cut interest rates twice already this year and Deutsche Bank Global Markets Research chief economist Taimur Baig backs the view that major stimulus is unlikely.

“China is between a rock and a hard place. They need policy measures but at the same time the macro situation is not that dire to call for major stimulus measures,” he told CNBC Asia. “And of course there’s distaste for big stimulus measures given the aftermath of the 2008-09 crisis. So, our view is that for the rest of the year we are only likely to get mild stimulus measures.”

China’s last round of stimulus has increasingly drawn criticism and Reuters carries a report this week that highlights some of the problems the massive $US586 billion spending package has caused for some businesses, such as the country’s steel traders.

According to the report, some steel traders are feeling the strain as they battle bad debts that have arisen after they were forced to take money that was released by the government under the stimulus program.

“After the financial crisis, when the government released its stimulus, banks begged us to borrow money we didn’t need,” Reuters reports Shanghai Shunze Steel Trading owner Li Huanhan as telling a recent court hearing. “We had nothing to do with the money, so we turned to other investments, like real estate.”

Among other key excerpts from the story:

“While some loans did go towards equipment and expansion, executives admit money was also used for pet property projects, plush apartments and stock market bets.

“By the end of last year, China’s steel industry had a total debt burden of $US400 billion – around the size of South Africa’s economy. Some of China’s leading mills alone owe 200-300 billion yuan ($US32-$US47 billion), according to the China Iron and Steel Association.

“The aggressive tack by China’s lenders, many of which are state-controlled, comes as pressure builds inside a stretched financial system. Results at China’s big banks show profit growth is at its weakest since the global financial crisis, while bad loans rose for a third straight quarter to 456.5 billion yuan ($US71.8 billion) by June, the China Banking Regulatory Commission said this month.

“Steel traders are unlikely to be helping the bad loan issue, with Shanghai steel futures having almost halved from their 2009 highs to below 3400 yuan ($US540) a metric ton (1.1023 ton).”

Nevertheless, even with some major sectors feeling the strain many believe that China’s economic growth story isn’t facing an imminent end. BusinessWeek pitches in with its take on why growth will continue, quoting experts such economic historian and Nobel laureate Robert Fogel.

Writes BusinessWeek: “Fogel argues (PDF) there is certainly the potential for China to continue growing at 8 percent until 2030. Despite an aging (PDF) population, there are still opportunities for more adults to work. And more of that labor will likely move into more productive sectors over time – out of agriculture and into manufacturing and services. These two factors alone could account for 30 per cent of the country’s continued growth, Fogel suggests.”

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