China has responded to the slump in its economy by doing what it knows best: it plans to build its way out of trouble.
The government has announced a Rmb4,000bn ($585bn, €465bn, £413bn) investment plan over two years, the bulk of which will be directed at infrastructure projects.
The fiscal stimulus package has some “green” tinges, most notably the commitment to step up the already sizeable investment in rail infrastructure and improvements to the power network. Such plans have even prompted some bold claims: a new report by the HSBC Centre for Climate Change concludes that 34 per cent of China’s stimulus package is “green” investment.
However, despite some of the hype, the green credentials of China’s fiscal package are difficult to pin down. For a start, four months after the plan was launched there is still considerable confusion about where the money will be spent and how much will be genuine fiscal stimulus. Economists estimate that only a quarter to a third of the headline number will be new spending that would not have taken place anyway. The stimulus plan is “an aspirational target” rather than a detailed blueprint, says Stephen Green, economist at Standard Chartered in Shanghai.
Investment in railways – the plan’s principal green claim – will be one of the priorities, with likely spending this year of Rmb400bn-Rmb500bn. But, according to figures released from the ministry of transport, this will be less than half the amount of money spent on building roads – about Rmb1,000bn a year – while airports and housing are also slated to receive boosts.
The broader reason for questioning the green impact of the stimulus package is that it aims to boost the economy via construction. Many economists believe such heavy infrastructure investment will delay the much-needed shift in China’s growth model towards domestic consumption and services, which would be more sustainable in both economic and environmental terms.
“There are some green projects in there, but the basic idea is investment and then more investment in infrastructure, whether it is needed or not,” says one prominent Chinese economist in Beijing.
Even the increased spending on railways, which will reduce China’s emphasis on road transport, comes with a downside for the environment. It will also help provide a lifeline to the country’s steel industry, whose rapid expansion over the past decade has been one of the biggest contributors to rising pollution, deteriorating energy efficiency and soaring demand for natural resources. Standard Chartered estimates that the expansion of the railways this year alone will consume 30m tonnes of steel.
The other important issue will be how the stimulus plan and the slowing economy impact on China’s ambitious programme for improving energy efficiency, which was lauded by US President Barack Obama in his speech to Congress this week.
In 2005, China said it would cut energy intensity by 20 per cent before 2010. The results for the first two years were well below target but officials said on Tuesday that energy use per unit of output fell by 4.5 per cent in 2008.
The risk is that rising unemployment saps the momentum behind local government efforts to weed out inefficient and polluting factories and to enforce tougher rules. But, given that the slump in the economy has been felt hardest in heavy industry, energy efficiency could improve sharply.
“When the growth rate slows, then you should see a big slowdown in energy usage and improved efficiency,” says Hu Angang, an economist at Tsinghua University in Beijing. “Big energy users like steel and cement will have to reduce capacity.”
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