Why Markets Should Get Over The ‘Hype’ About The Chinese Stimulus

china bicycle flag

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When China approved massive infrastructure projects over a two day period, a move celebrated by markets, we pointed out some big red flags.Now Societe Generale’s Wei Yao is out with a new note in which she questions the ‘hype’ over the stimulus projects as well.

She also thinks markets should stop expecting a massive stimulus along the lines of the 4 trillion yuan package in 2008:

  1. All the plans that have been approved are scheduled to take place over the next five years and it is unclear how local governments are going to finance the projects. Funding from land and tax revenue is unlikely to be as easy as before since the growth of both has slowed. And banks are concerned about bad debts.
  2. The project approvals themselves are ‘misleading’ since they were posted on September 5-6, but they were approved from April – August. “Hence, a sudden increase in the number of website posts does not mean a sudden increase in Beijing’s willingness to push projects through.”
  3. There will be a lag between when the projects are approved and when they start. This is because any project that needs public funding in any way has to go through a long process –  before it can set off. 
  4. The 4 trillion yuan package announced in 2008 was implemented in two years. In the current round, 50 per cent are expected to take four to five years, 40 per cent are expected to take six to eight years, and the final 10 per cent are likely to take three years. “Hence, the average investment per year is actually not that impressive, and any disruption can happen during the life of the projects.”

Yao is also sceptical that the 1 trillion yuan of fiscal reserves that premier Wen Jiabao pointed to because the use of this “fiscal lever” has to be approved by a budget process which would have to take place during the National People’s Congress in March.

She points out that policymakers were judicious about tapping that fund even in 2008 when they launched their massive stimulus.

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