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China's best move: the one-trillion stimulus

By Catherine Wood: 0 Comment(s)Print E-mail China.org.cn, September 13, 2012

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Make your mind up time [By Jiao Haiyang/China.org.cn]

The world seems to be looking to China to save the international market. Why? Because China is experienced in saving the world from apparent collapse; it did so in 2009. Last time the numbers looked this bad (2009), China announced a 4 trillion yuan stimulus package. The aid raised future projections for China and its neighboring economies; China then witnessed a higher than anticipated growth.

Unfortunately, the effects of government stimulus are often only temporary, and once again, industries will look to the government to boost business and spur demand. Having little ability to control world demand, China will once again have to tackle this problem by starting at home. Last week, a 1-trillion yuan infrastructure initiative plan was announced. This insurgence of aid is expected to alleviate low growth expectations for 3Q12 and raise GDP in 4Q12. In theory, this initiative would raise imports from Japan and lower production costs of outgoing exports, yielding a higher overall trade volume.

But will it work?

There are numerous downsides to this kind of plan. Its critics say it only creates industrial dependence on the government. Chief economist at Credit Suisse, Dong Tao in Hong Kong, offers the following opinion: "The answer to the key question, will China bounce back and rescue everyone like it did in 2009, is 'no.' China is facing structural problems that counter-cyclical remedies cannot fix...The private sector cannot find areas to make enough profit to justify its investment." He maintains that the growth is artificial and is only lucrative because it is reliant on the government. The other risk of huge government investments is a rapid devaluation of the national currency caused by inflation.

While people like Dong Tao are quick to criticize these incentive programs, they are hesitant to offer a solution. Ultimately, the government must avoid recession and drastic foreseeable increases in unemployment at all costs, which I think it can do. And I'm not the only one. Positive effects in the market can already be seen amidst the stimulus announcement – people have faith in the PRC.

What Dong fails to recognize is that the path to success and GDP growth has to be a two-fold plan: long- and short- term. Without short-term aid, there can be zero hope for long-term success, and without a long-term plan, the short-term aid is only artificially helpful – putting the economy in the same, or a worse, position as soon as the aid runs out.

I believe the 1-trillion yuan stimulus is only part of China's answer. When experts like Dong criticize the artificial growth on the short-term, they only see half the solution. Yet China needs short-term solutions to make it to plan for the long haul. After all, this isn't China's first rodeo.

The stimulus package will relieve the impact felt at home due to decreased demand abroad, increase jobs, and boost consumer confidence in the market. China knows that consumer confidence, both domestically and internationally, is key in sustaining growth. Prices for goods will be slightly subsidized by the plan, offsetting any inflation, and ensure the affordability of Chinese products abroad. But as I already discussed, China cannot influence global demand for their products, at least not directly.

International economies are hurting, especially those of the EU and North America, and they do not have the capital on-hand to buy Chinese-manufactured goods. China is helping to solve this problem by continuing to buy foreign bonds, which I consider a wise move. Not only does this help foreign economies and create stronger international ties, it also ensures China's trading partners have money to buy. Investing in the economic well-being of trading partners ensures continual economic growth and continual demand of Chinese manufactured goods...a long-term goal. Even further into the future, we will see China's investments paying off as foreign bonds will come to maturity.

China knows what it is doing. And in this way we see China creating both long- and short-term plans to increase the value of their economy both domestically and abroad. Will this stimulus package work? I say "how could it not?"

The author is a freelance writer currently based in Beijing.

Opinion articles reflect the views of their authors, not necessarily those of China.org.cn

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