Although doom-laden talk of an Olympian hangover follows every summer games, the mainland’s sizzling economy was supposed to be immune from the traditional slump. But policymakers spent most of last month sounding increasingly gloomy about the prospects for economic growth this year.
The prevailing fear is that an inevitable post-Olympic slump is being exacerbated by global recessionary headwinds, producing a much sharper economic slowdown than anyone expected. The way out of this mess, according to one popular theory, is for the central government to boost the sagging economy with a massive fiscal stimulus package – possibly in the region of US$60 billion.
The premise of this argument is strange indeed. With the economy still expected to grow in the region of 10% this year, it is difficult to see why a fiscal stimulus is needed.
Only a few months ago, Beijing was desperately trying to slow down the economy before it “overheated.” Now that the resulting policies seem to be working, the scaremongers are out to convince us that the Chinese economy is in far worse shape than any of us thought.
The problem with this analysis is that it simply isn’t true.
The idea that Beijing’s Olympic building binge would be greeted with an almighty economic hangover is ridiculous. Yes, total Olympic-related spending over the past six years came to a massive US$42 billion – but that represented just 0.5% of the US$7.5 trillion spent on fixed-asset investment during the same period.
Moreover, the vast majority of so-called Olympic spending actually went on public infrastructure projects that were needed anyway. With the country’s urban population growing at 15 million a year, the demand this kind of infrastructure – in Beijing as elsewhere – will remain strong.
Although exports will continue to fall, this is no cause for worry – not least because retail sales and fixed-asset investment remain encouragingly high. Most economists expect GDP growth to fall to around 10% this year – well down from last year’s stellar 11.9% – before reaching perhaps 9% in 2009. This is merely the “soft landing” targeted by policymakers for the past couple of years.
Besides making economic expansion less wasteful, slower growth will also help push Chinese exporters up the value chain and speed-up industrial consolidation – all reasons to be cheerful.
Even in the highly unlikely event of the economy going pear-shaped, policymakers have plenty of monetary and fiscal weapons to combat a precipitous slowdown. After recording its first fiscal surplus since 1985 last year, Beijing saw this year’s surplus grow by a remarkable 32.1% in the first seven months. At that pace, the government can expect to run a surplus of around US$88 billion for the year – roughly 10% of budgeted expenditure.
This makes a significant hike in public spending in the coming months increasingly likely.
Obvious targets for investment include social services, with an emphasis on improving the country’s dilapidated health care system and subsidizing schooling in rural areas, and traditional public infrastructure. A large chunk of cash will also be directed toward post-earthquake reconstruction.
A rich government of a poor country has no business in scrooging away its people’s savings: Beijing should spend its cash not because it is worried about losing a percentage point of GDP but because it wants to improve its people’s lives.