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Pick a number, any number – or better still, don’t. China, already presiding over one of the world’s largest fiscal stimulus packages (roughly double America’s as a percentage of gross domestic product, taken at face value) has hinted at further spending in recent weeks. Talk is cheap and effective: the Shanghai Composite index is up by a fifth this year.
In the event, Thursday’s report by premier Wen Jiabao did not deliver any increase on the near-$600bn stimulus package announced in November. No matter. It is clear China will use whatever money is necessary to avert a sharp slowdown – although pledges to hit 8 per cent growth this year look bold. The planned budget deficit of $140bn equates to nearly 3 per cent of GDP, above China’s recent run-rate of sub-1 per cent, or surpluses, but is certainly no cause for blushes in today’s world. Chinese media reports suggest that the deficit has already been ratcheted up at least twice since December; if tax revenues do not add up, expect further increases rather than any contraction in expenditure. And if that is not enough, there are plenty of other taps to turn on. As brokerage CLSA notes, the Communist party must be the most liquid institution in the world. It controls the banks, which have huge undeployed deposits, and sits on $2,000bn of foreign exchange reserves.
That leaves the bigger question of how productive spending will be. China actually needs roads and bridges. Real estate and construction account for a bigger slice of output than net exports, so spending should feed directly into jobs, growth and higher commodity prices. Beyond infrastructure, however, the picture is bleaker. Beijing has removed virtually all constraints imposed on the property sector during the bubble, but prices continue to slide. Credit extended to state-owned enterprises, in the meantime, will inevitably result in more overcapacity and bad debts. But these are tomorrow’s problems. Punters who bought on the rumours were so enamoured of Mr Wen’s yarn they forgot to sell on the news.
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