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Sweet stimulus

12 Jul 2012 By Wei Gu

China’s economy is being driven by politics and timing. Premier Wen Jiabao said on July 10 that investment remained key to spurring growth, suggesting the possibility of stimulating the economy, as China did in 2008. No one wants to end their reign with a hard landing. But pushing more investment would make things harder for Wen’s successors, who take over early next year.

China’s economy doesn’t look in desperate need of a rescue now. Second-quarter GDP is expected to rise by 7.6 percent in the second quarter, according to analysts polled by Reuters. Anything below 8 percent may seem sluggish for Chinese leaders, who have seen average 10 percent growth during their decade at the helm. They have already cut rates twice in a month to give the economy an extra kick.

Another big fiscal stimulus might help Wen’s growth record. But that may not be in the best interest of new leaders. As in democracies, that would make it easier for them to put their own mark on the economy, and avoid disappointing. Li Keqiang, widely expected to become China’s next premier, has been talking about the need for longer-term growth drivers and structural reforms, rather than a short-term fix.

China is still recovering from the hangover of the 4 trillion yuan ($600 billion) stimulus package implemented in 2009. The industries that are suffering most now, such as appliances makers, auto companies, and equipment makers, are among those that benefited most from the infrastructure investment boom and consumption subsidies in the last round.

Consider home appliance company Midea, which slashed 30,000 workers in 2011. BYD, an auto company in which U.S. investor Warren Buffett owns a stake, cut 20,000 workers in 2011. Heavy equipment maker Sany’s headcount fell 3,000 in the first half of 2012. Front-loading demand has made it more painful when the incentives are taken away.

As growth slides further, Wen’s prescription of investment-led growth may seem more appealing. But it would be the wrong medicine, as it makes the eventual adjustment even more painful.


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