China stimulus – wishful thinking

Posted on September 9, 2012

Hands up if you thought China was serious about rebalancing its economy away from investment. The Rmb1tn ($160bn) in infrastructure spending plans announced by its top economic planning agency last week suggest that it is not. But the economic slowdown means it needs growth. The question is whether the plans represent more than just a wish list.

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The National Development and Reform Commission last week approved 25 urban rail and 13 highway construction projects, and a number of water schemes. The problem is one of financing. Few details were released. Asset quality is fast deteriorating among Chinese banks as bad debts emerge from the latest round of misspent stimulus. That will damp their will to lend. And local government finances are in tatters. Beijing estimates that their debts stand at Rmb11tn, or a quarter of China’s output. Moody’s thinks the debts could be Rmb3.5tn higher. Granted, China has Rmb19tn in foreign exchange reserves and a strong official fiscal position. But converting reserves into renminbi to spend at home will destabilise the exchange rate. And disguised indebtedness in local governments could put the debt-to-output ratio far north of its official 17 per cent.

    Yet that did not stop investors from piling into infrastructure stocks on Friday. Steelmakers Angang and Maanshan picked up more than 6 per cent. Machinery maker Zoomlion was up over 8 per cent. Still, these moves were off a low base. Investors know that structural and overcapacity problems plague these industries regardless of infrastructure spending. Inventory is mounting: finished steel products were up 60 per cent at the end of July from a year earlier.

    Urbanisation remains a long-term play. About 70 per cent of China’s 100-odd cities with a population of 5m or more do not have a metro, HSBC notes. But in today’s tougher funding environment, big spending announcements will not translate into guaranteed growth.

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