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

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 30^th 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]

 

 

 

 

 

China: attacks on doctor

The safety of doctors has been one of the important news about China. A doctor who is working for a hospital  in Guangdong Province was surrounded and humiliated by more than one hundred people on Wednesday afternoon this week.

According to reports, the crowd dragged and paraded the weeping doctor in the courtyard for failing to save a drunk 37-year-old man from dying of a heart attack.

Actually, the similar issues have taken place several times in China. The family of patients cannot understand the effort of doctors is one of the most important reasons. In china, the doctors need to work very fast for meet the large demand of patients. The patient always wait for 3 hours for to meet the doctors for 3 mins. Therefore, the communication between them is not enough.  They need to build the communication channels between medical workers and patients need to be improved.

On the other hand, the Chinese people always hate” rich people”. The poor people always think the doctors are too easy to make money. Majority Chinese people think doctors are “business men” so that they do not respect the doctors.

Xi Jinpin has added his comments in the meeting several days ago. He said the government needs to keep the doctors safe. His talking may be the best way to supervise the government to avoid the tragedy happen again.

Central Bank of China Intervenes to Lower CNY

China’s central bank has begun helping the country’s exports this year. It has unsettled traders by intervening heavily in currency markets for the last week, pushing the CNY down steadily.

On this Tuesday, the fall continued, bringing the currency’s loss against the US dollar for the year  to 1 percent. However,  the CNY increased 3 percent against the US dollar last year. The recent decline also interrupts what had seemed to be a steady rise in the Chinese currency, which had been eroding the competitiveness of Chinese exports. The Chinese government hope to increase the export for keeping the growth of Chinese economy.

The performance of China stock market may be the worst stock market in the world during the past several years and the future of it is still negative. On the other hand, more and more investment come from China to other countries.  Although the Chinese economy is still growing faster than almost any other countries, the pace is slowing. China may not be the economic engine in the world. Hence,  The domestic market cannot support the continue economic growth. It should rely on the growth of other countries.

Therefore, the lower CNY is the strategy of Chinese government to keep the continue economic growth.

The “war” between China and Japan in Africa

Japanese Prime Minister Shinzo Abe visited to Mozambique last month. He promised to help Africa to create job and provided hundreds of millions of dollars in aids. Abe told to the BBC that Japan “cannot provide African leaders with beautiful houses or beautiful ministerial buildings.” Instead, Japan’s policy is “to really aid the human capital of Africa.” It caused a war of words.

Lu Shaye who is the head of the Chinese Foreign Ministry’s African affairs department defended to Abe. He said  China is “sincere,” Mr. Lu said, “unlike some countries”. He also said Japan aims to getting resources and markets and wanting to compete with China and to win votes at the United Nations.

China always keep the good relationship with African countries. China financed majority infrastructure projects in Africa, Such as government buildings, roads and railways. The resources are regarded as the payment by the Africa countries to the Chinese government. Actually, some Africans have become resentful, though, unhappy with unbalanced relationships in which China has taken proprietorship of African natural resources using Chinese labor and equipment without transferring skills and technology. “China takes our primary goods and sells us manufactured ones. This was also the essence of colonialism,” Lamido Sanusi, the governor of the Central Bank of Nigeria.

If Japan takes share in Africa, it will damage the profits of China. Therefor, China cannot loss this “war”.

The reasons of housing prices of China are high

China’s housing market has continued to boom alarmingly in the recent several years. The government has realised the seriousness of this problem and begun do some efforts to cool the prices. For example, Chinese government has increased the real estate transaction taxes and  limited the numbers and types of buyers. However, the results are not positive.

According to the statistic from Ehomeday, the volumes of new home sales in Shanghai increased by about 26% to 3.10 million sq. m., during the year to Q3 2013. The average sales price rose by 5% y-o-y to CNY 24,258 (US$ 3,955) in Q3 2013, also up by 2% from the previous quarter.  There are 3 main reasons of why the government cannot curb the housing prices.

First of all, the “home ownership” is the dream of all Chinese people. It means Chinese people are willing to struggle for the houses. In rural ares, the best lives for farmers is ” to build a house, married to daughter-in-law”. They will buy a house when they  enter adulthood. In urban areas, the parents prefer to buy a house rather than renting if their children hope to work in this city. These ideas keep the high demand for houses. Therefore, the real estate Gangsters are never worry about the sales of houses.

Next reason is the high taxes. It is said that the real state companies earn CNY 100, they need to pay CNY 61 to the government. It means the costs of houses  are quite high. Hence the real state corporations are not willing to decrease the prices. And worse still, the local  government are not really hope the prices of housing decrease. They can get the financial support from the property boom. Moreover,  the high GDP would bring positive influence to the local government officials.

Lastly, the real state companies may get in trouble if they decrease the house prices. The majority debts of these companies come form the banks. The interests of debts are quite high. In other words, if the prices of housing  reduce, the real state corporations may face the problem of negative cash flow or even cannot replay the loans.

The 3 reasons determined the housing prices of China cannot be curbed in the short term.

Reference: Globalpropertyguide (2013) “China property boom continues relentlessly” at http://www.globalpropertyguide.com/Asia/china/Price-History Accessed on 13/02/14