Stimulus only positive for headlines - Victor Shih

Victor Shih by Fantake via Flickr

China boast about its US$ 588 billion stimulus package at the G20, but assistant professor Victor Shih has very serious misgivings about the effects of the package, he writes in the Wall Street Journal . It might create positive headline numbers but has no effect on employment and private consumption.

More than three-quarters of the stimulus package will be spent on construction, including transportation infrastructure, earthquake reconstruction, welfare housing and rural infrastructure. Much of the money spent on earthquake reconstruction may prove productive, assuming local officials don't allocate the money to pet projects. After more than a decade of intensive infrastructure building elsewhere in China, however, it is dubious that additional construction on such a massive scale can generate economic returns beyond boosting short-term employment for a few months.

Most of the capital is not coming from the central government, Shih warns, but from Chinese banks and an additional US$ 3 trillion in local projects might have serious problems in getting funding to start with. Local government might just not be interested in handing out land for almost no compensation. Shih: "Local governments do not want to "waste" this land on public projects, especially when the central government has set a strict limit on the amount of farmland that can be developed."

The stimulus is thus legless: It looks impressive at the top, full of grandiose plans and ample financing from state banks, but lacks a solid foundation. The epic scale of central expenditure and state bank lending will generate some positive investment and GDP figures. Its impact at the grassroots level, however, is dubious. Beyond the short-term boost in employment and relatively small sums spent on social welfare and health, ordinary Chinese will see few benefits, limiting their capacity to spend in the midst of the global demand slump.

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Victor Shih is a speakers at the China Speakers Bureau . If you are interested in having him at your conference, do let us know.

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