Fail to plan and plan to fail: China’s 4 Trillion Stimulus Plan”

13 Mar

The State Council of The People’s Republic of China announced a 4 trillion-yuan (£421 billion) stimulus plan to stimulate the domestic economy and minimise the negative influence of global financial crisis in the year of 2008. A lot of economists criticised this stimulus packet would cause the overheated investment in capital and excess capacity and other negative impacts. In fact, the above worries came true. Worse still, these damages would continue for a long time. The results showed Chinese government made the wrong decision. This blog will evaluate this radical stimulus plan.

The investment structure is the main reason about why this stimulus plan caused so many problems. According to the graph (Mark Cranshaw, 2014) below, approximately 45% investment focused on the transport and power infrastructure. Although China got the benefits from it, enormous investment on this area leads to the rapid development of high-speed rail network and property boom in recent several years. However, it did more harm than good. The disadvantages of this plan include corruption, inflation and missing the chance of adjustment of industrial structure.

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(Mark Cranshaw, 2014)

High-speed rail experienced the fastest growth during this period. Mark Stone (2014) wrote “China has built 6,000 miles of track since 2008”. This is an undeniable fact that the developed high-speed rail network and other traffic construction have the positive influence on the Chinese economic and provided the convenience for civilians. However, these projects brought a lot of serious long-term problems.

First of all, the 4 trillion stimulus plan caused discretion abuse and much more political corruption. From the angle of economy, there is a principal-agent relationship with civil servants and taxpayers. The agent (government) will use their functional advantages to harm the benefits of principals (civics). For example, Liu Zhijun who is the China’s railways ministry was in charge a powerful department. However, he disbanded in March. BBC news (2013) reported he accepted bribes totalling more than 64m yuan (£6m). The other examples include Liu tienan (Ex-Energy Chief) and Jiang Jieming (Ex-Petrochinas Chairman). The 4 trillion Yuan caused power abuse to crony enrichment. They have excessive power to use the money.

Some people may argue that if there is no this plan, Chinese people cannot enjoy the convenience lives which brought by this stimulus plan. It is not true, because the opportunity cost is high. Opportunity cost means “the loss of other alternatives when one alternative is chosen”. If the State Council of The People’s Republic of China did not invest too much on the transport and power infrastructure, but focus on structural transformation of the economy, special on development of tertiary industry. Chinese people may not take high-way rail, but they do not need suffer the inflation and high house price. Therefore, missing the chance of structural transformation of the economy and causing inflation and high house price are the other disadvantages of this plan.

Inflation may be the most obvious problem which caused by this stimulus plan. We are clear that the government cannot afford 4 trillion Yuan for two reasons. One is it was impossible to sell so much government debt. The other is the government cannot get so much social funds as well. Therefore, the central bank had to adopt the method of printing money. It leaded the value of money fell. As a result, the serious inflation took place.

This plan also leaded the government “robbed” its civilians. Eric deCarbonnel (2009) observed that the percentage of M2 (broad money) of China reached 25.5 in March in 2009 and the figure of M1 (money stock) was only 17%. It means the investment was much higher than the demand. On the other hand, too much money rushed into the market. China is a developing country with high-saving population and poor social welfare. The value of money dropped means Chinese people were poorer than before. Furthermore, the efficiency of the investment of government is quite low because of overheated investment in capital and excess capacity. Therefore, the transaction cost does not decrease too much. It is the waste of civilian wealth.

Worse still, Dexter Roberts (2014) wrote that the debt of Chinese local government rose to 17.9 trillion Yuan ($2.96 trillion) on 30th December, 2013. It was the long-term damage to the government. They have to increase the tax or sell the land with high prices to the real estate companies for repaying the debt. It would decrease the life level of people and push up house prices. High house price destroyed middle class’s “Chinese Dream”. Some people think the real estate companies are the main reason of high house price. However, expensive land and high tax are also contributes big part of house price.

The last but not the least, China missed the best chance of structural transformation of the economy in recent years and destroyed the business environment of SMEs (small and medium-sized enterprises). Majority these companies are private enterprises. These companies not only create a great amount of social wealth but also solve employment problems. They also follow the rules of market economy. In addition, they are creativity. In fact, they are not hard to survive in this economic recession. However, the government put majority investment into the transport and infrastructure and other sunset industries. These companies even cannot get the loan from the bank. They would bankrupt because of running out of cash. It is not good for the health of China’s economy in the future.

This terrible plan which made by The State Council of The People’s Republic of China leads to the fail of this stimulus plan. It contributed limited in the economic recovery and caused a lot of serious problems, such as discretion abuse, political corruption, inflation and missing the chance of structural transformation of economy. Furthermore, these negative impacts will influence China in long term. However, current leaders of China have tried their best to fix the problems which caused by this plan. China would continue play the role of engine of the global economy.

 

Reference:

BBC (2013) China ex-rail minister given suspended death sentence. Available from: http://www.bbc.co.uk/news/world-asia-china-23222240 [Accessed 9 March]

Cranshaw, M. (2014). China’s arrival in global politics, Lecture distributed in the module uosm2018, Understanding modern China, at the University of Southampton. Southampton, 5 March.

DeCarbonnel, E (2009) China loan growth hits record high, M2 up 25.5 percent. Available from: http://www.marketskeptics.com/2009/04/china-loan-growth-hits-record-high-m2.html [Accessed 10 March]

Oxford Dictionaries (2014) Opportunity cost. Available from: http://www.oxforddictionaries.com/definition/english/opportunity-cost [Accessed 9 March]

Roberts D (2014) A peek at China’s local debt mess. Available from: http://www.businessweek.com/articles/2014-01-09/chinas-local-government-debt-is-almost-3-trillion [Accessed 10 March]

Stone, M (2014) China: high-speed rail network to be doubled. Available from: http://news.sky.com/story/1194709/china-high-speed-rail-network-to-be-doubled [Accessed 9 March]

 

 

 

 

 

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