More Of The Same Won’t Work

By John Richardson

MORE of the same won’t solve China’s problems.

“Economists worry that an influx of new cash (as part of China’s new economic stimulus package) will exacerbate some of the market distortions in areas that are already heavily state-dominated,” wrote the Financial Times, in an article on Tuesday.

The steel sector is an example of such distortions. Multi-billion dollar investments in new mills have been sanctioned by the government over the last two weeks, even through the steel industry’s profits fell by 68 percent in the first quarter of this year compared with Q1 2011, continued the same article.

This latest economic stimulus package, however, does include efforts to boost domestic consumption, such as another subsidies programme for purchases of home appliances.

But as one steel analyst told the FT, the stimulus package as a whole is heavily skewed towards funding for state-owned enterprises.

“The state advances and the private sector retreats,” he said.

China’s leaders are probably panicking, given the weakness in the global economy.

This stimulus package, though, is smaller in scale than that which was introduced 2008, and is very probably only a stop-gap measure.

We won’t have a clear idea of China’s longer-term economic direction until after October, when the country’s new leaders are set to take office.

Then we will know, broadly speaking and with lots of shades of grey, whether the new leadership will opt for:

*The status quo – i.e. more spending directed towards wasteful investment and state-owned companies. This would worsen China’s bad debt problems and lengthen the process of rebalancing.

*A muddle- through halfway house: Some reforms, but nothing too quick and drastic, in order to keep the “vested interests” happy.

*A radical reform programme, in line with the 12th Five-Year-Plan (2011-2015) that could, ultimately, deliver enormous new growth, but will involve a painful adjustment process of several years of reduced economic expansion.

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