Don't expect another stimulus from China

Bloomberg reported last week that Beijing was accelerating 300 infrastructure projects valued at 7 trillion yuan or $1.4 trillion. The Australian dollar, which has been used as a proxy for the Chinese economy, rose after the report.  

Many people have made a quick connection between the reported investment plan with the 4 trillion yuan fiscal stimulus unleased in the aftermath of the global financial crisis. So is Beijing turning to its old trick of using infrastructure investment to boost a slowing economy?

Luo Guosan, the deputy director general in charge of investment at the powerful National Development and Reform Commission, the country's economic planning agency, told the press the current plan was fundamentally different from the emergency fiscal stimulus of 2008.

“We are not injecting new money to unleash a new round of strong stimulus. What we are doing is attracting private capital to invest and this is a very important new policy direction,” he said at a press conference in response to the media report. 

The bigger question we need to ask is whether Beijing will embark on strong stimulus measures this year to boost its slowing economy. This will have serious implications for Australian commodities exporters as they battle failing commodities prices. The price of iron ore just dipped below $70 for the first time in five years.

Throughout 2014, Beijing resisted the temptation to embark on a new round of strong stimulus measures despite many speculative reports as well as pleading from struggling sectors such as the steel and cement industries.  Though there were bursts of new investment throughout the year, there was nothing like the massive fiscal stimulus unleashed in 2008 after the US subprime meltdown. 

The Chinese central bank also didn't indulge in loose monetary policy in 2014. The bank only cut interest rates once and did so reluctantly to address the issue of high borrowing costs for struggling Chinese small and medium sized business.  

Though China still faces many challenges, there has been no dramatic change in circumstances to warrant a U-turn in macro-economic policy. Most importantly, many problems associated with the last round of stimulus have surfaced in recent years such as rapidly increasing debts, in both local governments and corporates. Excess capacity in the steel and cement sectors is also causing headaches for the government.

It is worth remembering that Beijing devotes a considerable portion of its substantial budget on infrastructure projects every year. For example, during the first 11 months of 2014, Beijing invested close to 10 trillion yuan or $2 trillion in assorted infrastructure projects, up 20 per cent from the previous year.

If Beijing were to keep the same pace of investment growth, the total budget for investment would likely be around 13 trillion yuan. The reported 7 trillion planned projects are most likely part of the existing investment plan. This is different from the 4 trillion stimulus in 2008 when the Chinese export trade collapsed. The central government unleashed a raft of new spending.

Another crucial difference between the reported 7 trillion planned spending and the 2008 rescue package is finance. One of the most important but often overlooked aspects of the 2008 stimulus was the massive expansion in credit creation. Chinese banks doubled their new lending in 2009, reaching a historic high. This record was not broken until last year.

All evidence suggests this new round of infrastructure spending is not fully funded.  The Chinese authorities are betting on the involvement of private and foreign capitals to bankroll future projects.  Private Public Partnerships is one the hottest buzz words floating around at the moment. This should not come as a surprise, the central government has been keeping a close eye on local government debt and regulators have been cracking down on off-balance sheet lending.

Heavily indebted local governments will find it increasingly difficult to access credit. So in essence, even if they want to indulge in their investment addiction, the money is not there.

In the past, there have been a lot of speculative media reports about the Chinese government indulging in another round of stimulus to boost the slowing economy. Many of them have turned out to be false. Beijing has shown remarkable restraint so far. They know that they cannot drink poison to quench their thirst.

Unless there is a dramatic turn in economic fortunes in China, we should not expect a strong fiscal response from the Chinese government. They are still nursing their debt-fuelled hangover from 2008.