CHINA STIMULUS

CHINA’S BIG BANG

REUTERS/Aly Song

Two years and 4 trillion yuan later, China’s stimulus package is drawing
to a close. It powered the Asian giant through the global financial crisis
and saved the world from a more serious recession. But at what cost to
China in bad debt and wasted investment? And will the end of China’s
spending binge spell trouble for the global economy?

NOVEMBER 2010
CHINA STIMULUS NOVEMBER 2010

Sun sets on steamrollers as

China stimulus plan ends
By Simon Rabinovitch and Zhou Xin
BEIJING, Nov 5 China’s economic stimulus

E
very night after Beijing goes to sleep, a The stimulus at a glance How China spent its stimulus – %
swarm of steamrollers, excavators and Amount $600 bln (4 trln yuan) 37.5 Infrastructure*
dump trucks takes over the city and em- Launch date Nov 2008 25.0 Post-earthquake reconst.
barks on a construction frenzy that lasts until End date End of 2010
10.0 Affordable housing
dawn when office workers reclaim the streets. Funding 30% by central govt,
remainder by local govts, 9.25 Rural infrastructure
Flattening ground for new roads, building banks and companies
9.25 Technology
Jobs created* 24 million
bridges and digging subway tunnels, they are the
GDP growth, 2009 9.1% 5.25 Environmental protection
moonlit manifestation of an investment surge
GDP growth, 2010* 10% 3.75 Health/Education
that has multiplied throughout the vast country *Estimated 0 10 20 30 40 50 60
over the past two years. In doing so, they have Stimulus-induced booms: rising car sales & house prices
propelled China past the global financial crisis Car sales – % chg y/y Housing price index
and propped up the world economy, but have 125 120

also left a murky trail of bad bank loans and 100 116

wasteful investment in their wake. 75 112

They are the bearers of the stimulus package 50 108

China launched on Nov 9, 2008. The two-year, 25 104

4 trillion yuan ($600 billion) investment pro- 0 100
gramme is now coming to a close – at the very -25 96
2006 2007 2008 2009 2010
time the United States, still struggling to kick-
start its economy, is ramping up its monetary *Includes roads, rail and water infrastructure
Sources: National Development and Reform Commission, National Bureau of Statistics, Reuters EcoWin.
stimulus. Reuters graphic/Christine Chan 03/11/10

At its inception, there was much skepticism

about whether China could carry off its plans. A
quick return to double-digit growth erased those AVOIDING WITHDRAWAL SYMPTOMS THE STIMULUS IN
doubts. The stimulus began with a bang. NUMBERS

g
As the programme comes to an end, however, Within days of its announcement on Nov. 9,
questions persist about the legacy of the spend- 2008, hotel rooms near the National Develop-

4
ing binge, an experiment in gargantuan pump- ment and Reform Commission, China’s top plan-
priming that will shape the Chinese economy, for ning agency, were booked up as local officials The stimulus
better or for worse, for years to come. flocked to Beijing to seek fast-track funding for package totalled 4
“If you take medicine, you will inevitably face their pet projects. trillion yuan ($600
side effects,” said Chen Quansheng, adviser to Bank credit spiked. New loans tripled from Oc- billion), equal to
the State Council, or cabinet. “Every medicine is tober to November, and then kept rising until the about 13.3 percent
three parts poison.” middle of 2009. of the country’s
The verdict, in other words, is mixed. The end of the stimulus will be much more GDP in 2008.
“The main benefit of it was, of course, sustain- gradual, alleviating worries that its withdrawal
ing growth. It was helpful for employment and in could hurt the Chinese economy or global mar-
preventing the crisis from happening in China,” kets.
said Wang Tao, chief China economist with UBS. For one thing, many of the biggest projects are
“But it also had costs,” she added. “The even- long-term.
tual size of the stimulus was probably too much,
so you create future problems of non-performing
loans and misallocation of assets.”
“Government investment and bank lending
will remain strong next year and the year after,
because it takes years to complete the ports,
The stimulus
officially runs
2
China’s official conclusion is thoroughly posi- highways and railways that we started during the for two years,
launched in
tive. stimulus,” Chen said. “Otherwise, these would all
November 2008
“The stimulus programme accorded with Chi- end up half-finished.” and closing at the
na’s reality and was timely, forceful and effec- Even without the stimulus carry-over, the Chi- end of 2010.
tive,” Premier Wen Jiabao said in September. “It nese economy is at a stage where government in-
was the correct decision and is good for us, for vestment remains a developmental requirement
later generations and for the world as a whole.” and not simply a counter-crisis tool.
2
CHINA STIMULUS
Dong Tao, an economist with Credit Suisse,
said infrastructure upgrades and social priori-
ties from healthcare to education will continue to
be showered with spending at the same time as
China winds down its broader stimulus.
“Beijing is no longer in a panic situation,” he
said. “The focus is shifting from the cyclical ac-
celeration of stimulus to structural reform, which
in my opinion is much more important.”
China has already been returning its monetary
policy to a normal footing. It has clamped down
on bank lending, raised bank reserve require-
ments four times this year and increased interest
rates last month for the first time in nearly three
years.
“We have to think about an exit strategy in
the post-crisis era,” said Jia Kang, director of a
research institute under the finance ministry.
“We’ll do it in a gradual and quiet manner.”
THE REPORT CARD
In trying to appraise the legacy of the stimulus,
the first problem is confusion about what it actu-
ally consisted of.
Although billed as a 4 trillion yuan package,
only 1.18 trillion yuan came from the central gov-
ernment, with unspecified amounts coming from
local governments, companies and banks.
But banks went beyond the call of duty, issu-
ing a record 9.6 trillion yuan of new loans last
year. They are on track to lend a further 7.5 tril-
NOVEMBER 2010
lion yuan this year. And many stimulus-type A worker stands on scaf-
programmes - notably, in tax breaks for people foldings at a construction
site in Hefei, Anhui province
buying small cars – were not formally part of the November 4, 2010.
stimulus package. REUTERS/Stringer
“The 4 trillion package was a bit like the tip
of the iceberg,” said Ardo Hansson, the World
Bank’s lead economist for China.
So rather than trying to count every bean,
economists say it is better to view the stimulus as
a policy stance – an extremely loose one, both in
1.18
fiscal and monetary terms.
The Shanghai-Hangzhou high-speed railway, a
line with an average speed of 350 kms/hr (220 The central
miles/hr), was one major beneficiary. government funded
Although proposed first in 2004, Beijing did 1.18 trillion yuan,
not approve the 30 billion yuan project until or 30 percent of
2008, two days after the stimulus was launched. the package, with
Construction began three months later and, at local governments,
its peak, more than 40,000 workers and 5,000 banks and
companies
heavy vehicles worked on the 202-km (130-mile)
providing the rest.
railway. The train went into service last month.
“There was a lot of investment. It was imple-
mented fairly quickly. And the types of things
they spent it on were not old sunset industries.
It was more high-speed rail, local infrastructure,
earthquake infrastructure. So that mix was fine,”
Hansson said.
HIDDEN COSTS
The big knock against the stimulus is the way the
government financed the investment, with its
3
CHINA STIMULUS NOVEMBER 2010

heavy reliance on bank lending.

“It creates this illusion that without any cost to China’s local government debt
the government, you can just ask banks to lend How regulators view the risks
and everything will be fine,” said Wang Tao of
Total loans to local govt financing vehicles Sources of loans to local govt financing vehicles
UBS.
Debt is fully backed Debt will be recovered Small and Large
The true cost will become clearer over time, as by projects that from secondary medium banks state-owned
chunks of loans go bad and work their way back received
financing
source, eg. govt
revenue
26% banks
40%
onto Beijing’s balance sheet. 24% 50%

Local governments, which are officially barred

from borrowing, created thousands of financ- Total loans:
7.66
Total loans:
7.66
ing vehicles to get around the restrictions. They trln yuan trln yuan

racked up 7.66 trillion yuan in debt by the middle

of this year, according to the bank regulator. Debt is Govt
at serious controlled
After first denying the severity of the problem, risk of default policy banks
26% 34%
regulators earlier this year began to take it more
seriously, pledging to clean up whatever mess
Sources: Thomson Reuters, China Securities Journal.
has been left behind. Reuters graphic/Christine Chan 03/11/10
As a first step, they launched a probe to assess
the scale of the liability. They reported last month and Europe, all of which remained mired in weak
that 26 percent of loans to local governments, or growth and saddled with huge debt burdens.
about 2 trillion yuan, were at serious risk of de- Somewhat reluctantly, Beijing has been thrust
fault. into a central position in discussions about how
“If the government had a chance to do it again,
it would have done it in a slightly different way,”
said Dong Tao of Credit Suisse, noting one im-
to reform the global financial system.
“The financial crisis revealed the power of
the Chinese economy. Everyone was a little sur-
9.59
Chinese banks
provement would have been to finance more prised, and no one more so than the Chinese,” extended a record
projects through bonds rather than loans. said a diplomat in Beijing, who spoke on the con- 9.59 trillion yuan
“Infrastructure investment is typically a 10-year dition of anonymity. in new loans
or 30-year project, but you’re using a one- or two- in 2009, more
On the capital’s streets, there is little sign yet of
than answering
year bank loan and rolling them over. That’s dif- a slowdown in the investment that steered China
Beijing’s call to
ficult,” he said. through the global turmoil and past Japan as the fund government-
world’s second-largest economy. initiated
VISIBLE SUCCESS Yet make no mistake, the frenzy is coming to investments.
But the overall size of the liability should be more an end. Beijing, for example, is still in the middle
than manageable in a country where direct gov- of building or expanding 11 subway lines, but has
ernment debt remains less than 20 percent of plans for just two more after that.
gross domestic product. The riskiest loans to lo- “We work every night and I don’t know how
cal governments equate to about just 6 percent long that can continue,” said Zhang Yuming,

7.66
of GDP. 30, a steamroller driver who wore an army-style
Praising China for its response to the global greatcoat against the midnight chill.
financial crisis, Moody’s Investor Service last “Most of the big roads have already been built.” Outstanding
month put the government’s bond rating on re- loans to local
view for a possible upgrade. (Additional reporting by Langi Chiang, Aileen government
China’s success has been all the more stun- Wang and Kevin Yao; Editing by Ken Wills and financing vehicles
ning in comparison with the United States, Japan Dean Yates) were 7.66 trillion
yuan at the end
of June. Chinese
provinces, cities
and towns,
officially barred
from borrowing
TRADING CHINA directly, launched
If you are a China equities market participant, welcome to join the Thomson Reuters thousands of
hybrid government-
Trading China community. We bring you closer to policy makers, industry experts and
private bodies to
Reuters journalists for the inside story. To learn more and apply, click here get around the
You can also get connected with Trading China on Facebook: restrictions and
http://www.facebook.com/TradingChina fund infrastructure
spending.

4
CHINA STIMULUS NOVEMBER 2010

World looks to China after

growth-salvaging stimulus
By Alan Wheatley,
Global Economics Correspondent China’s monetary stimulus
BEIJING, Nov 8
Lending boom and money growth

T
he giant fiscal stimulus and bank lending 2000
Monthly new yuan loans – bln yuan M2 growth – % y/y
30
spree that China launched two years ago
saved the world from recession. What can
Beijing do for a follow-up act? 1500 25

Internationally, the success of the unprec- 1000 20

edented pump-priming has accelerated a shift
in economic influence that has put Beijing front
and centre of policymaking, as this week’s sum- 500 15

mit of the G20 major economies in Seoul is likely

to show. 0 10
2006 2007 2008 2009 2010
Domestically, the 4 trillion yuan package an-
nounced on Nov. 9, 2008, put a floor under an Sources: Reuters EcoWin, People’s Bank of China.

economy that was in free fall due to the global Reuters graphic/Christine Chan 03/11/10

financial crisis. More than 20 million migrant

workers who lost their jobs were quickly ab-
sorbed as the government started an array of
public works projects.
Two years on, China can boast, among other
things, the world’s biggest high-speed rail net-
work, which is doing wonders for the country’s
reputation.
“China’s self-confidence got a big boost from
the fiscal programme which goes beyond the im-
mediate economic effects,” said Jonathan Fenby,
head of China research at Trusted Sources, an
emerging markets consultancy.
Fenby said the tangible results of the spending
splurge can only increase China’s pride in its abil-
ity to raise its game.
“One cannot help making comparisons with in-
frastructure in the U.S. and U.K.,” he said. “I am
sure the Chinese do.”
Success, however, heightens expectations.
China, now the world’s second-largest econo-
my, is under pressure to shoulder more responsi-
bility for everything from curtailing carbon emis-
sions to reducing global economic imbalances.
Beijing’s response to date has been to toss the
ball back into the court of developed countries,
particularly the United States, which it holds re-
sponsible for the world’s economic woes.
“We came through the financial crisis test very
well. We got full marks, 100 percent, but we’re
being criticised by those who failed to pass the
exam,” said Li Daokui, an economics professor
who advises China’s central bank.
“REVOLUTIONARY” CHANGE
Chinese leaders for decades have deliberately
kept a low foreign policy profile to concentrate on
maintaining economic growth and political sta-
bility at home.
But Elizabeth Economy, director for Asia Stud-
ies at the Council on Foreign Relations in New
York, argues that China has come to realise that
• China’s
achieving those goals today requires actively stimulus
managing events beyond its borders. kept world
In the financial sphere, for example, China has
growing
successfully pushed for greater power at the In-
ternational Monetary Fund (IMF), becoming its in 2009
third-biggest shareholder.
“China is transforming the world as it trans-
• Political
forms itself.
Never mind notions of a responsible stakehold- demands on
er; China has become a revolutionary power,” China grow
Economy writes in the latest edition of Foreign as economy
Affairs.
Revolutionary is an evocative word. But is it too
booms
strong to describe the impact that China’s eco-
nomic rise, sustained by the two-year fiscal pro- • Brazil,
gramme, is having on the rest of the world?
Germany
According to the IMF, the global economy grew
just 0.19 percent last year, measured in terms of among big
purchasing power parity. winners of
China, expanding nearly 10 times faster, con-
strong China
tributed 1.19 percentage points to that growth.
In short, it really did save the world from reces- demand
sion.
And that is without accounting for knock-on
effects, such as bolstered business confidence,
higher commodity prices and lower global inter-
est rates, that researchers trace back to China.
“Clearly it made a significant contribution. It’s
there in the numbers. But beyond the arithmetic
5
CHINA STIMULUS NOVEMBER 2010

People visit the Shanghai World Expo site October 30, 2010. REUTERS/Aly Song

impact, if you take into account spillover effects, to Africa and Latin America, have been stand-out

26
the contribution is even larger,” said Vivek Arora, beneficiaries of the stimulus.
assistant director of the IMF’s Asia-Pacific De- China’s share of global demand for industrial
partment. commodities jumped to 46 percent in 2009 from About 26
percent of all
31 percent in 2008, Richard Cookson and Alexan-
loans to local
BRAZIL, GERMANY GIVE THANKS der Godwin at Citi Private Bank said in a report. In government
Looking at it in another way, China contributed 1999, the figure was just 7 percent. financing vehicles,
a whopping 46 percent of global domestic de- “China’s development boosts commodity pric- or 2 trillion yuan,
mand in 2009, more than double the average of es and maintains demand in a context where are at serious
22 percent from 2000-2009, according to Gold- demand has decreased in our traditional major risk of default,
man Sachs. markets in Europe and Japan,” said Clodoaldo according to
“Suffice it to say, without the support of the Hugueney, Brazil’s ambassador to Beijing. regulators.
infrastructure package, China’s growth would But the benefits of the stimulus are not lim-
have been much smaller and the global contrac- ited to emerging markets. Germany is enjoying
tion substantially larger,” said Ivailo Izvorski, lead a mini-boom in large part due to insatiable Chi-
Asia-Pacific economist for the World Bank. nese demand for the high-end machinery, chem-
(At market exchange rates, world gross domes- icals and cars it manufactures.
tic product shrank 5.46 percent in 2009, despite China’s total imports in the first nine months 9.6 g 9.1
a positive contribution from China of 0.76 per- were $300 billion more than in the same period g 10.0
China’s gross
centage point, according to the IMF.) last year.
domestic product
On top of China’s 9.1 percent GDP growth last “At the current pace, in another 12-18 months,
rose 9.6 percent in
year, Yolanda Fernandez-Lommen with the Asian German trade with China could be as big as Ger- 2008. Despite the
Development Bank in Beijing stresses the role man trade with France,” said Jim O’Neill, chair- global financial
Beijing played in shoring up financial stability man of Goldman Sachs Asset Management. crisis, the stimulus
during the crisis. “If you are doing business in Munich, what is powered it to 9.1
Beijing has purchased $50 billion of IMF happening in China is more important than what percent growth in
bonds, established $95 billion in bilateral cur- is happening in the rest of Europe – and possibly 2009 and has put
rency swaps with a clutch of countries and pro- in the rest of Germany,” O’Neill told Reuters dur- it on track for 10.0
percent growth
vided a third of the funds for a regional financial ing a visit to Beijing.
this year.
fall-back mechanism, she noted.
Exporters of natural resources, from Australia (Editing by Mathew Veedon)

6
CHINA STIMULUS NOVEMBER 2010

Even with bad loans, China’s

debt load is light
By Simon Rabinovitch
Chief Economics Correspondent, China
BEIJING, Nov 11

C
ritics of China’s success in overcoming
the global financial crisis say that the China's bank-led stimulus
manner of its stimulus – in particular, an
over-reliance on bank loans – will come back to Percent of GDP Deficit New bank loans
haunt it. 30

As the first chart shows, the sceptics certainly 25

have a point in drawing attention to the role of
20
credit issuance in powering the economy over
the past two years. Although the government’s 15

4 trillion yuan ($600 billion) stimulus package 10

dominated the headlines, it was banks that did
5
the heavy lifting.
But the second chart paints a much more 0

11/10/10
sanguine picture of the fall-out from China’s lop-
-5
sided stimulus model. 1/1/98 1/1/99 1/1/00 1/1/01 1/1/02 1/1/03 1/1/04 1/1/05 1/1/06 1/1/07 1/1/08 1/1/09

Worries have centred on the roughly 8 trillion

Source: People's Bank of China, Reuters News
yuan in loans to local governments. Regulators Reuters graphic/Catherine Trevethan
estimate that 26 percent of this debt might go
bad and that another 50 percent may only be
recoverable from secondary sources, such as
fiscal revenues.
Working on the aggressive assumption that the
government will eventually find itself on the hook China’s light debt load
for all 76 percent of these loans, this chart shows
estimates that China’s overall debt load was 47.7 Trillion yuan Big risk default Backed by revenue
percent of GDP in 2009 and will be 48.3 percent Debt 47.7% - GDP
Local debt 2009 GDP – 33.55 trln yuan
in 2010.
Central Bad
That is well below debt levels in most debt loans
developed economies and also below levels in
many developing economies.
No wonder Moody’s gave this assessment Debt 48.3% of GDP
Local debt 2010 GDP – 39 trln yuan

in upgrading Chinese government bonds on

Thursday: Central
debt
Bad
loans
“Contingent liabilities on the central
11/11/10

government’s balance sheet – arising from the 2010 Deficit

credit surge in 2009 and sharp rises in financing 0 10 20 30 40 50

vehicles associated with local-level governments

Source: China MInistry of Finance, Reuters News
– are evidently likely to be manageable.” Reuters graphic/Catherine Trevethan

(Editing by Ken Wills)

7
CHINA STIMULUS
As stimulus party ends, China
braces for a hangover
By Kevin Yao
BEIJING, Nov 9
C
hina’s forceful response to the global
financial crisis did wonders for the
economy at home and abroad, but the
government now has its work cut out to keep the
bill for the investment binge from swelling in size.
Aside from the upfront costs, the worry is
that there will be a resurgence in bad loans and
inflation long after the two-year 4 trillion ($600
billion) stimulus package, announced on Nov. 9,
2008, draws to a close.
And there is an additional concern about
less easily observable damage – that the burst
of spending may have exacerbated economic
distortions that could undermine the country’s
long-term growth potential.
“There are definitely some side effects. The
stimulus could create hidden perils for the
economy in the long term,” said Wang Hu, an
economist at Shenyin & Wanguo Securities in
Shanghai.
The biggest concerns reside in the banking
system, because China’s stimulus programme,
unlike those in the United States and Europe,
was mainly financed by credit.
Chinese banks doled out a record 9.6 trillion
yuan ($1.4 trillion) in new loans in 2009, nearly
double the total of a year earlier, and will lend
another 7.5 trillion yuan or so this year.
“That is seen as the cloud hanging over the
Chinese economy right now,” said David Cohen,
economist at Action Economics in Singapore.
Most of the bank loans ended up in the hands
of cash-hungry local governments, which
scrambled to kick off big-ticket infrastructure
projects.
Risks for banks could rise as the government
phases out its stimulus, putting pressure on local
authorities trying to roll over existing loans.
The good news is that state-owned banks,
anticipating trouble, have already made inroads
in cleaning up their balance sheets.
China Construction Bank last week said it would
raise 61.6 billion yuan in a deeply discounted
rights offer.
Bank of China has announced the terms for
its rights issue. Industrial and Commercial Bank
NOVEMBER 2010
After a $600 billion stimulus package, China might
continue a loose fiscal policy together with a tightening
monetary policy, says Jia Kang, economist under the
Ministry of Finance.
of China has also received approval to sell new
shares.
• Stimulus a
INFLATION RISK success but
The flood of cash from the stimulus has fuelled may create
concerns about a property bubble and could also hidden perils
put upward pressure on inflation more broadly,
analysts say. They forecast that data on Thursday
will show inflation reached 4 percent in October. • Banks have
made strides
The government and the central bank are in cleaning
certainly not blind to these risks. At the end
of last year, they declared that controlling
up balance
inflationary expectations would be a priority in sheets
their management of the economy.
However, though they have begun to normalise • But inflation
monetary conditions, some analysts worry that
they have moved too slowly.
worries have
Even the People’s Bank of China noted in a not abated
recent report that the broad M2 measure of
monetary growth, rising at a clip of 19 percent • There are
year on year, remained too strong.
“The lagging effect of the previous credit surge
also signs of
will continue for a while,” it said. a set-back in
China’s central bank raised interest rates last reforms
month for the first time in nearly three years and
there is market speculation another increase is
around the corner. Yet annual economic growth
8
CHINA STIMULUS NOVEMBER 2010

has been slowing at the same time, to 9.6 percent

in the third quarter from 11.9 percent in the first
quarter.
“This could lead to a situation in which policy
making will face a dilemma. On the one hand,
economic growth needs a relatively loose
environment, but rising inflation pressure may
call for policy tightening,” said Wang at Shenyin
& Wanguo.

REVERSAL OF REFORMS?
A final concern about the stimulus is much harder
to quantify, but serious nonetheless.
With the government’s attention focused on
the rush to invest over the past two years, there
was some stalling of the reforms needed for the
economy to shift towards a more consumption-
based growth model, such as an experiment in
rural land transfers.
Some bad habits may also have been revived. Beijing needs the private sector to pick up the A pedestrian walks past the
The Asian Development Bank recently warned slack – and private firms need the government to headquarters of the People’s
Bank of China, the central
that over-investment in China could depress its give them the space to thrive again. bank, in Beijing November 8,
productivity and lead to excess capacity in some “The government needs to continue to rely 2010. REUTERS/Grace Liang
industries. on market policy and not say it was successful
Investment alone contributed about 90 percent in combating crisis ‘so let’s go back to old
to China’s growth in 2009.
And private firms, which over the past three
decades had emerged as engines of growth and
administrative ways’,” said Tao Wang, chief China
economist with UBS.
“Some of the benefits that were earned from
Beijing has 24
said the stimulus
job creation, were squeezed in the course of the painful restructuring might get a bit reversed.” spending was
spending boom, with bank loans and public on track to create
funds lavished on state-owned giants. (Additional reporting by Langi Chiang and Simon at least 24
As the government withdraws the stimulus, Rabinovitch) million jobs.

Cover Photo: A man looks at the bullet trains serving the new high-speed railway linking Shanghai and Hangzhou in Shanghai
October 26, 2010. REUTERS/Aly Song

For comments, queries or tips:

Vidya Ranganathan Simon Rabinovitch
Economics Editor, Asia Chief Economics Correspondent, China
Phone: +65-68703090 Phone +86 10 6627 1270
Vidya.Ranganathan@thomsonreuters.com simon.rabinovitch@thomsonreuters.com

© Thomson Reuters 2010. All rights reserved.

Republication or redistribution of Thomson Reuters con-
tent, including by framing or similar means, is prohibited
without the prior written consent of Thomson Reuters.
‘Reuters’ and the Reuters logo are registered trademarks
and trademarks of Thomson Reuters and its affiliated
companies.