China’s economy expanded by 7.4 percent in the first three months this year, the lowest rate since July 2012. This data, combined with various other statistics, has prompted some analysts to see gloomy prospects for the country on the road ahead.
Their logic goes like this: economic growth fuelled by government-led investment is simply unsustainable and mounting government debt as well as excessive liquidity will further complicate the issue. Their prescription is for the Chinese economy to rely more on consumer spending.
But Justin Lin Yifu is not buying the diagnosis or the cure.
The former World Bank senior vice president and now one of Premier Li Keqiang’s top advisers, told Xinhua that a consumption-driven rebound can lead to a false dawn and the present downturn in growth is more to do with the prevailing global economic winds rather than China’s own woes.
Lin insists that investment, which has been somewhat demonized by many economists following Beijing’s 4 trillion yuan (US$641.8 billion) stimulus package back in 2008, is still the key to rejuvenating the economy.
He contends that the prerequisite for consumption, or internal demand, is a robust rise in disposable income, which in turn hinges on an improvement in labor productivity. And, the only way to boost productivity is through continuous investment in technical innovation and industrial upgrades. From this angle, investment in infrastructure is essential.
If Lin’s points are set alongside recent State Council policy initiatives, it’s safe to say that the premier and Lin see eye to eye on many aspects.
Since the start of the year, Li and his cabinet have rolled out a slew of new investment-led programs. These include the Yangtze River belt master plan to tie regional economies along a “golden waterway”, a fresh round of expressway construction in western China as well as a batch of 80 key infrastructure projects that are open to private capital.
Many observers have expressed grave concerns that more investment programs could exacerbate the financial problems of some debt-laden local governments. But Lin argues that we should not read too much into the problem — with a 50 percent savings rate and a massive foreign exchange reserve of US$3.9 trillion, Beijing has enough room to maneuver.
The National Audit Office also said last year that the combined liabilities of the central and local authorities may equal 40 percent of the nation’s gross domestic product, a level much lower than many estimates.
Yet, Zhu Baoliang, chief economist at the National Statistics Bureau’s State Information Center, has said that various local authorities and their financing vehicles will have up to 2.4 trillion yuan in maturing debt this year, the highest amount in five years. The estimate revived fears that some local governments may default on debt payments.
But Lin is not a believer.
He maintains that the debt predicament is a long way from being a systematic threat and basically no foreign entities are involved. Unlike the countries entangled in the European debt crisis where money is borrowed to subsidize consumption and social welfare programs, most of the capital leveraged by China’s local cadres is for infrastructure projects and residential and commercial developments and so not money down the drain. On top of that, most of the debts are well secured by government assets.
The real problem, according to Lin, is that officials use short-term debt to fund various mega projects with payback periods that may stretch for a decade or even longer. His solution is to grant local authorities the autonomy to issue long-term bonds on their own.
Again, his proposal dovetails with Li’s policies. Last month, 10 provinces and municipalities were given the go-ahead to issue municipal bonds as part of a pilot scheme to diversify their financing sources. Local authorities are now allowed to sell and repay their own debts while previously the Finance Ministry would sell bonds on behalf of local governments and take responsibility for repayments. Guangdong alone has issued bonds worth 14.8 billion yuan.
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