Written by Laurence Brahm - Published by South China Morning Post on 06/02/2009

In November 2008, as the world reeled from the global financial crisis, China was among the first to announce an aggressive fiscal stimulus package, amounting to 4 trillion yuan (HK$ 4.54 trillion) for 2009. However, the budget has already been blown. In the first quarter, China has spent 4.6 trillion yuan on fiscal stimulus – equal to the entire fiscal spending for last year.

A further 5 trillion to 6 trillion yuan is being estimated for the remaining three quarters of this year and 2010 combined. But this seems like another underestimate. The voracious consumption of cash in China today is unprecedented. The banks are literally “shovelling cash out the door”, as one Chinese banker described the massive frenzy of economic stimulus. To date, that has only meant unviable repeat projects or the blind production of items already in excess. Most funds have gone to state-owned enterprises. Meanwhile, state-owned banks’ non-performing assets are expected to rise. This will put the banking system back by decades, recreating the mess that former premier Zhu Rongji so painstakingly cleared.

China’s fiscal stimulus programme cannot be expected to address any hard issues of the Chinese economy, which requires structural adjustments in production processes, plus wage increases. Increased money supply will stimulate inflation, but not necessarily broad-based consumption. To develop a true consumption-driven economic model will take at least another four years. The global economic slowdown and drop in exports will affect China’s new industrial rich, leaving only crony- and corruption-based, high-end consumption to create the appearance, but not the reality, of a consumption-based economy.

Meanwhile, a distorted picture of economic growth will prevail in the second half of the year. Disregarding market needs as the world downsizes its requirements, China’s factories keep blindly producing goods, to keep workers busy. Local governments have been given mandates to maintain social stability in this key year marking the 60th anniversary of the founding of the People’s Republic. So funds have been made available to keep up production, regardless of market demand.

Given the sensitivity of key anniversaries this year, the government is determined to keep workers busy in the factories. Each province is responsible for its own social stability, so local officials are being pressed to connect state-owned enterprises with the state-owned banks to send the economy into another spending spree.

However, growth tied to fiscal spending is not all about politics; underlying economic factors are a concern, too. One view is that US President Barack Obama’s own fiscal stimulus package should bring recovery by the end of the third year of his first term. If China’s export sector can dovetail with this revival in American consumption, it would avoid a potential depression. At least this is the optimistic view. Others believe such a scenario is wishful thinking. Instead, they see the possibility of an economic crash in multiple industrial sectors in a year.

Economists in Beijing are starting to blame China’s woes on US capitalism, its highly leveraged credit system and excessive consumption. Many of these economists, inebriated with China’s own successful sustained growth model, have declared the death knell of US capitalism. Their counterparts in Washington blame the global depression on China’s trade surplus and strengthened currency. Debt and overcapacity, however, will soon pose problems for both nations. It’s more than likely that the financial crisis is not going to dissipate or disappear.

Such finger pointing is unnecessary and irrelevant political grandstanding on both sides. After all, the factors that led to growth in America and China during the 1990s and the first half of this decade are, in large part, due to the interrelationship of industry and consumption, and the leveraged financial instruments that made all those good things happen.

Laurence Brahm is a global activist, international mediator, political columnist and author. He is the leading advocate of a fresh development paradigm - The Himalayan Consensus - an innovative approach to development.

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