China's fiscal guns are ready to fire. Premier Wen Jiabao reminded the world this week that government debt is low, and the country has scope to spend its way back to rapid growth. Investors believe it will: Shanghai's stock market closed up on Sept.10, even as China showed August exports barely grew year on year.
On paper, Mr. Wen can afford to be generous. China's central government debt is around 15 per cent of GDP, and its fiscal deficit below 2 per cent. Add in the provinces and total government debt is still below 50 per cent. There's also cash to spare. As well as a 100 billion yuan surplus outlined by Mr. Wen, many government agencies also have unquantified hidden reserves – known as "little cashboxes" – squirrelled away. Those could be spent without official debt levels rising.
There's no shortage of hopeful recipients. Cities have been announcing ambitious investment plans. Some are frivolous, – such as Kaifeng's plan to build a $15-billion (U.S.) Song dynasty town centre. B but seemingly sensible p Projects like such as subways and sewers are being approved, and need funding. For now it's a question of timing. Some stimulation is already happening. Land sales, which is how local governments make most of their money, more than doubled between July and August. Last month's government spending increased by 12 per cent, year on year.
But there are good reasons to hold back. There are tentative signs that the euro zone may be coming back from the brink, which would improve China's trade. Non-fiscal tweaks, such as plans to increase the speed at which rebates are paid to exporters, might help some sectors. Politically, there are limits too, as China enters potentially six months of leadership transition. The biggest reason for restraint, however, is that it's not yet clear things are bad enough.
Freight, electrical consumption and trade are all showing a sharp slowdown. But the government's targeted growth rate for the year is 7.5 per cent, and the actual figure in the second quarter was 7.6 per cent – uncomfortable for industries used to faster growth but hardly a return to the depths of the crisis. For now, the big stimulus guns are best left in the holster.