China’s package risks damaging development

China’s much-vaunted stimulus package has exacerbated structural imbalances in the economy and may delay the country’s transition to a more sustainable growth model, according to some leading economists.

Most analysts regard the Rmb4,000bn ($585bn) plan, unveiled in November, as an appropriate response to the crisis and say it pulled the economy out of what could have been a much deeper slump. However, as the effects of the stimulus fade, some now say the response was too aggressive and that the government’s focus on an unprecedented credit expansion and a massive infrastructure boost has aggravated the country’s stark economic imbalances.

“The economy’s structural problems have been made worse by the stimulus programme,” Wang Yijiang, a professor of economics at the Cheung Kong Graduate School of Business in Beijing, told the Financial Times. He pointed to resurgent asset bubbles in the stock and property markets and the fact that most of the stimulus had gone to the state sector, while smaller private enterprises, which create the most jobs, had been left largely to fend for themselves.

“The stimulus package was a response to a crisis rather than aimed at rebalancing China’s growth model,” said Jonathan Woetzel, a director in -McKinsey’s Shanghai office. “In the short term, Beijing’s stimulus and monetary policy are perpetuating the imbalances.” A report published today by the McKinsey Global Institute points out that 89 per cent of the entire stimulus package is devoted to infrastructure investment such as roads and railways, while just 8 per cent is allocated to supporting consumption.

Private consumption in China has declined sharply as a share of overall GDP since the mid-1980s, accounting for only 36 per cent – the lowest ratio of any major economy, reflecting China’s reliance on investment as its main growth driver. “Today’s low consumption share is systemic, and China will not be able to tackle this issue without comprehensive reform that includes structural change,” says the report.

Mr Woetzel said: “China’s economic growth profile has been very employment-light and there is a need to rebalance investment away from the traditional emphasis on heavy industry and infrastructure towards smaller, private enterprises, especially in the services sector.” –Jamil Anderlini in Beijing, Financial Times