4 Reasons To Be sceptical About China's New Stimulus

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Photo: Chris Graythen / Getty Images

Markets have been celebrating the massive Chinese infrastructure stimulus that the National Development and Reform Commission announced between September 5-6.The Shanghai Composite that has been taking a beating surged nearly 4 per cent in overnight trading, and copper futures also got a nice boost on the news.

But we’ve spotted some reasons to be concerned:

  1. Some 25 – 50 per cent of the projects are expected to be funded by local governments. But local governments have been impacted by the economic slowdown, and some speculate that they have been selling land to meet their revenue goals.
  2. Local governments rely on financial vehicles (LGFV) to raise funds, and Chinese non-performing loans have been rising. The China Banking Regulatory Commission (CBRC) expects commercial banks to cap loans to LGFVs and Societe Generale’s Wei Yao said that it was evident that the CBRC was getting anxious since it began focusing on reducing bank’s exposure to LGFVs in the first quarter of the year and issued repeated credit risk warnings through the year. So, while stimulus might be a good thing, there is the risk that it could exacerbate China’s bad debt problem.
  3. When China announced its 4 trillion yuan stimulus in 2009 – 2010 the NDRC already warned of China’s excess capacity problem – when production is lower than optimal levels and reflects lack of demand. While infrastructure development is expected to help certain industries suffering from this problem, the way this growth is financed might not be healthy.
  4. Some of these projects might already have been a part of local government stimulus plans and might not be “new’. Moreover, Bank of America’s Ting Lu warns that it might be too late for growth to recover in the third quarter.

Note: We’re reaching out to our experts and will have a follow-up for you soon.

Don’t Miss: An Analyst Tells Us Why The Latest Chinese Stimulus Could Be A Game Changer >

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