Stimulus: 3 Days that will change the WorldWritten by Julen Madariaga on December 9th, 2008
This week the international observers are observing us with renewed interest: China’s Annual Central Economic Work Conference is being held in Beijing Monday to Wednesday, where the country’s leaders will decide how to maintain a stable economic growth that will “improve people’s livelihood“.
Expectations are high on the meeting that will change the World. The trouble is, it will not. Xinhua has just published a first official explanation from NDRC, containing no news. The 40BRMB for “healthcare, education and cultural undertakings”, or the 280BRMB for housing projects were already announced before the meeting. If anything, note that now they have added the “cultural undertakings” for extra flavour.
What about all the rebalancing of the economy that we were supposed to see?
What began as a series of advice by some economists has evolved into a streak of generalized optimism, as more people started to believe that Chinese leaders will take the chance now to rebalance the economy. I suspect this very optimistic and profusely quoted World Bank report is partly responsible for this state of mind.
But the rebalancing of China’s economy, including a social safety net, health care, and all sorts of measures to bring into the economy the 900 milion rural residents that have been left out is not going to happen now. Because it doesn’t make sense.
Here is why:
1- Hu Jintao hasn’t been able to implement his rebalancing policies during the first half of the 11 year plan. It is difficult to imagine that the development hawks in the CCP will allow him to implement them precisely now. Especially considering that things like a health care system are costly and someone needs to finance them. How much power do Hu and Wen really have to oppose the immediate interests of business?
2- Chinese like to save money, that is just the way they are, it is a trait of character. No amount of health care or land reform is going to make them spend more in 2009. How would it make sense that the same people who were saving during an economic boom decide to spend more now that there is fear of crisis?
3- All the social rebalancing and Scientific Development of Hu might be great for the long term, but they will not help China weather a difficult 2009. The real worries of the leaders now are: How well will the system resist the social and political tensions that will arise? And how well will Hu Jintao and an already fragile Social Wen resist them in the Party?
An emergency package
But there is a more fundamental objection to the notion that the stimulus package will implement any serious structural change: it is not its role. It is an effort to save an emergency situation and avoid the worst aspects of the crisis (notably unemployment) getting too serious.
And the sad fact is that great restructurings are not done in advance of crises, they are done afterwards. Hard times comes first, then reform. As an example, a quick look back at one of the historical cases that is most fashionable these days: FDR started his famous New Deal only in 1933, well after the crash of 29. In the meantime what was Hoover doing? Investing in infrastructure, like the Chinese now.
So will the package improve the livelihood of the peasants? Well, if you consider that buying a new color TV at a discount price is going to change their lifes, then yes. But otherwise, not.
The subsidies to buy home appliances that WSJ mentions here are clever measures, and they will probably be effective to boost the consumption of some farmers in the short term. Which makes sense, because the factories producing those TVs have to keep running, unless someone imagines that a legion of jobless manufacturing workers can be set to construct roads and railways overnight.
But nobody should be fooled: these are no social measures. They are measures to help the manufacturing companies to find a substitution market for the failing exports.
Another related “social” measure which might be hidden in the stimulus budget is an emergency fund to cover the possible cases of layoff riots. Victor Shih estimates it in his blog to be around 120BRMB in the worst of cases. I don’t think the government would be announcing this fund publicly, as it is a signal for disaster. But if 120B are missing in the 4Trillion package, now you know were to look.
It is all very healthy to dream, but I am afraid the largest part of China’s money in 2009 will go to help the companies resist the crisis and to mitigate the effects of it. The leaders are nervous, and the time is not for experiments.
But enough of stimulus already. Too much has been said, and I have the feeling that there are more important things to watch right now. Namely: Unemployement and Currency.
I have done enough tea leaf reading in my posts as of late, so I will leave these two subjects for next time. But if you want to know what 2009 is going to bring us in China, make sure keep an eye on them.