China’s new mini-stimulus offers signs of worry and progress

China factory workers Many countries wouldn't worry about coming in below an impressive 7.5% growth rate

China has just announced more government spending to boost the economy.

If growth was on course to hit its target of 7.5% this year, then China wouldn't be undertaking borrowing to spend.

Although the last fiscal stimulus lasted for years, bolstered by small measures since, this is perhaps the first time that the State Council has announced new stimulus measures - since the 2008 global financial crisis - that rely predominantly on bond markets for financing.

It seems that the Chinese government is worried enough to undertake a new mini-stimulus, as the sums to be spent are not large but should bump up GDP growth if successful.

Railway projects

Some of the government spending is just pushing forward infrastructure projects - rail, social housing - that had been planned.

But, the acceleration itself is a sign of worry. It's what China did in 2009 when it injected fresh stimulus to support the economy alongside planned spending on roads and railways.

At the time it was criticised for not spending enough on social welfare that could boost consumption, but investment is the easier way towards growth for China.

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The fiscal stimulus measures are being financed by the central and not local governments, and via bond markets rather than bank lending”

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As a result, an excessive reliance on credit was another worrying legacy from the last stimulus, one that has now raised risks in the economy.

But, this time, there's progress. Unlike the way the last stimulus was financed, the central government is issuing bonds to finance the spending.

The reliance on local governments to finance most of the 2009 fiscal stimulus was one of the causes of the growth in borrowing, as localities can't issue bonds independently. So all of that sizeable spending ended up being financed by bank loans from state-owned banks.

The rapid growth in debt since then is a real cause of concern for the Chinese economy, as debt is estimated to be 200% of GDP.

So, this time, the central government is borrowing from the bond market, which is more the way market economies would do it.

China will issue 150bn yuan of bonds ($24bn; £14.4bn) this year to finance railways in the less-developed central and western regions.

China also announced a new 200-300bn yuan fund ($32-48bn) to finance the 6,600 kilometres (4,101 miles) of new railways this year, the bulk of which will also be in the lesser-developed interior.

It will also invest more than 1 trillion yuan ($161bn) in social housing, redeveloping shanty towns.

It looks like that will be financed by bonds issued by the China Development Bank, a development bank that essentially operates as an arm of the state.

Targets must be hit

So, the Chinese government will again issue bonds rather than rely on bank lending.

There will also be some preferential tax treatment for small and medium-sized firms.

That is also how fiscal policy operates, rather than what China has done before - which is to direct credit to support state-owned enterprises, for instance, when it wanted to boost industrial output.

So, this new mini-stimulus is pushing output forward to help China meet its growth target this year.

Many countries wouldn't worry about coming in below an impressive 7.5% growth rate. But, for Chinese officials, targets are not to be missed.

It's certainly a sign that they are worried. But, the fiscal stimulus measures are being financed by the central and not local governments, and via bond markets rather than bank lending.

And that is progress.

Linda Yueh Article written by Linda Yueh Linda Yueh Chief business correspondent

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  • rate this

    Comment number 19.

    @Azo, China should not have the default on the loan, instead it should make the illegal invader Japan picking up the tab. China would never have the needs to borrow and spend so much if it was not illegally invaded by Japan on some pathetic excuse that one of its soldiers was killed

  • rate this

    Comment number 18.

    I just don't get the logic of this "consumers holding off because they feel prices will drop". It doesn't stop anyone buying what they actually need or even gadgets like smart phones and PC's that in a few months' time will be much lower in price. I suspect the truth is it keeps the Ponzi banking system going having some inflation. Deflation would actually be good for disposable incomes I believe

  • rate this

    Comment number 17.

    "Actually China has defaulted on war loans, which are claimed by some to be in the tune of 0.8 - 1.0 trillion dollars."

    Technically that was Republic of China (the one currently controls Taiwan). It's said the war loan was one of the reason why Chairman Mao didn't invade Taiwan, so his PRC government wouldn't inherit the debt from the ROC. Smart wasn't he.

  • rate this

    Comment number 16.

    Perhaps Mr Osborne could take a few pages of advice from this Little Red Book...

  • rate this

    Comment number 15.


    Actually China has defaulted on war loans, which are claimed by some to be in the tune of 0.8 - 1.0 trillion dollars.

  • rate this

    Comment number 14.

    7: China will need good Public infrastructure in order to hold together over the next hundred years or so.
    Just look how a small island like Britain has balkanised with the reduction of its Public cohesion. Imagine a huge country like China splintering ?
    An unpleasant prospect.
    Funny how Americanisation causes turmoil.....

  • rate this

    Comment number 13.

    The debt......many of those who visit them for advice come with five or more credit cards. On average such people have debts of £27,000 each.

    == Linda, have you ever heard that a Chinese borrowed so much money they could not pay back and then ended up visiting a debt advisor? Is english so interesting?

  • rate this

    Comment number 12.

    Agreed with 11Joey, this article is about economy and not political system. All major economies have borrowed money to improve their economies, China is doing the same and should be congratulate for proactively managing the risk. US and EU will benefit from this action and will not want to see the 2nd largest economy to crash or go into recession

  • Comment number 11.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 10.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 9.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this

    Comment number 8.

    @6. Joey - What I was saying is that the people of China are far less likely to put up with the Chinese government if they don't keep the money reeling in; because frankly the Chinese governments view on human rights is shocking. As for Japan, yes they have ~200% of GDP public debt but they have an extremely stable economy, holding assets second only to the US, and nearly 10% of US debt.

  • rate this

    Comment number 7.

    China is trying to do the Industrial Revolution+ in a couple of decades, there are bound to be stresses. It wouldnt take much for it to all blow up with civil unrest. Millions wont want to go back to paddyfields, they will all want fridges, washing machines, cars, healthcare, consumer goods, fish etc. Hey- they already eat half the planets pigs, millions of them, & they havent really got going yet

  • rate this

    Comment number 6.

    @3 benkenta, as if the democracy countries are not in huge debt, who created 2008 saga? What 2008 crash has really taught us is that, it's nothing to do with one party rule/democracy, but the level of risks countries are willing to take. Japan is building up a huge debt to stimulate its economy and could dragged the world's economy with it. Its government is doing so to buy votes,

  • rate this

    Comment number 5.

    "And that is progress."

    The implication here is that the Chinese economic policy up to now was inadequate. Given their relative success (relative to the west and to comparable up and coming nations), this smacks of ideological condescension.

    "you might think you know what's good for you, but we know better".

  • rate this

    Comment number 4.

    If you think our Government fiddles the figures get a load of China. I I suspect that like the West there is vast debt lurking there.

    The business model, which consists mainly of exporting of huge quantities of cheap tat to the West and building cities without people, is now showing its limitations and there is a massive demographic bomb waiting to go off.

    Problems ahead for China

  • rate this

    Comment number 3.

    What goes up must come down; spending like this is not sustainable unless the projects pay for themselves. Put that on top of the massive spending China made in 2008 to shield themselves from the financial crisis. I certainly don't want the world to be dragged down with China's corrupt one party authoritarian regime. They can only appease their ~1.3 billion population for so long.

  • rate this

    Comment number 2.

    £30 billion for 4101 miles of railway. That's about 20 High Speed Two's at about 2/3 of the cost. God help us.

  • rate this

    Comment number 1.

    Don't worry Linda, this spending on construction is not exactly the TVA (May 1933).

    If you want something to really worry about choose the abandonment of economics teaching on the cause of the 2008 crash - methinks some banker has his hand in not wanting bad news. Bankers (& Regulators) just want to hear that they can continue in the same old ways that caused the crash - and ignore TBTF!



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