Chinese Premier Wen Jiabao Says No Additional Funding for Now
Rumors about the Chinese government’s plans to add new stimulus funding to the country’s struggling economy were squelched on Thursday during the start of the National People’s Congress in Beijing. During his opening speech at the annual meeting — which runs through March 13 and is viewed more as a political rubber stamp than a policy-making session — Premier Wen Jiabao said that the government’s stimulus package put forward last November would remain unchanged for now, according to a report in The Wall Street Journal. That plan included 4 trillion yuan ($585 billion) in investment, although thus far the government hasn’t been very specific about where the money will go.
That’s a critical point. On the whole, economists seem to agree that in order to stay afloat during the current global financial crisis, China will need to focus its energy on the country’s domestic market — but it’s not clear under the current stimulus program that the government has a workable plan in place to increase consumer demand at home.
According to Michael Pettis, a professor at Peking University’s Guanghua School of Management, instead of reducing China’s export dependence, the stimulus is having the opposite effect. In an opinion piece in the Wall Street Journal Asia, Pettis writes: “China's trade surplus has risen, from an already-high monthly trade surplus of just under $17 billion in the first half of 2008 to nearly $33 billion in the second half, with January figures this year clocking in at just over $39 billion. The stimulus isn't working because the money isn't going where it needs to go — to household consumers and service industries, whose rising demand could absorb a greater share of Chinese production.”
Pettis notes that Chinese manufacturers are receiving loans to improve technology and production. Meanwhile, households are benefitting from subsidies on appliance purchases and tax breaks, but these measures aren’t enough to counter the boost in manufacturing brought on by the stimulus. The result: “Although exports are declining, Chinese production capacity is declining at a slower pace than Chinese consumption. Since China's trade surplus is by definition the excess of its production over its consumption, China's trade surplus is actually growing. No matter how hard China pushes, its dependence has only increased.”
A recent article in Knowledge at Wharton titled, “Why China Needs to Grow Its Economy, or Risk Growing Unrest,” emphasizes the fact that China needs to maintain its targeted 8% growth rate in order to avoid increasing job losses and, ultimately, civil unrest – a point reiterated by Wen during Thursday’s speech. According to Pettis and others, hitting that target doesn’t seem likely: China’s growth fell to 6.8% in the fourth quarter of 2008, and, as China Knowledge at Wharton has reported, layoffs in sectors beyond low-value-added manufacturing are now on the rise.
Meanwhile, anyone hoping to see a glimmer of stability in the current economic climate might not want to pin their hopes yet on China, or the government’s outward confidence in its current stimulus plan. “China can and will eventually make the transition away from export-led growth, but no one should expect it to be quick or easy,” Pettis writes. “The transition from one development model to another is a long and painful process.”