2010 nears, and with it China's efforts to return its economy to normal, or a "new normal." Is it time to wean itself off its 4 trillion yuan fiscal stimulus and 10 trillion yuan credit expansionary policy, or continue it a while longer?
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The stimulus policy has been short term effective in girding up GDP growth. The Central Meeting for Economic Works, an annual gathering of top Chinese leaders and economic policy makers who set guidelines for economic policy, will assess the soundness of the policy and try to define where China's economy will head in the coming year.
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The massive expansionary fiscal policy and loose monetary policy have had a serious side effect-increasing economic imbalances. China's economy is overly driven by investment, with a relatively shrinking contribution of consumption to economic growth and exports still experiencing a slow recovery.
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Chinastakes.com has learned that the National Development and Reform Commission (NDRC), both the mastermind and the war room for the massive government intervention, has prepared for the meeting to continue the high budget deficit policy, likely more that 950 billion and perhaps up to 1 trillion yuan in 2009.
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So, as China plans to stick to its expansionary policy and spend the remaining 2 trillion yuan from its stimulus package, fiscal expansion has "hi-jacked" monetary policy. The 2009 increase in credit has been projected at 10 trillion yuan. The China Banking Regulatory Commission has continuously expressed its concern, internally, about the aggressive lending and its consequences, the increasing heaps of nonperforming loans that are sure to appear in the coming years.
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The efficiency of investment is also deteriorating, while local governments are "creditizing" their fiscal deficits, i.e. their borrowings from banks are backed by future revenues, mainly from taxes and city land sold at high prices, further propping up already high house prices, all of which has bank regulators in a dither about the risks.
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The Economic Works meeting is also trying to come up with a new "industrial boosting" plan, this time focused on new energy, new materials, bio-tech, and medical tech. A new round of competition by local government for the new investment projects needing NDRC approval will come, leading to more borrowing and selling of public lands.
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Domestic imbalances also result in external imbalances. Over investment leads to manufacturing overcapacity and greater pressure to export it away. China has piled up US$2.2726 trillion in foreign reserves, a sum that continues to accumulate increasingly rapidly, due not a little to aggressive exporting supported by a low-valued yuan. Even some in China now see the need to exit from its quasi-peg to the US dollar.
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China's aggressive investment, mostly on infrastructure and heavy industry, may well cause imbalance between short term GDP growth and the long-term sustainability. The great leap of China's auto industry illustrates that China and the world may not be able to accommodate the effects from China's ever expanding growth.
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Another imbalance is between the real economy and asset markets. The loose monetary policy, with an increase in credit amounting to 8.92 trillion yuan in the first 10 months, has allowed asset bubbles, especially in the housing market.
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State-owned enterprises have taken advantage of the massive state intervention, crowding out the private sector from such industries as coal mining, steel, and real estate development. Instead of using tax cuts as its fiscal tool, the government is jacking up taxing on firms, private enterprises in particular, to make up the gap of its fiscal resources, putting the private sector in a tough spot.
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On top of all this, inflation concerns are returning. Some economists have projected that the central bank will hike interest rate as early as the first quarter next year.