China’s New Stimulus Efforts: Still Not Good Enough?

Look who’s adding more chips to the stimulus pile!

In an effort to relieve investors’ fears, the Chinese government just announced an additional 8 trillion CNY worth of economic stimulus to soften a potential hard landing in the world’s second largest economy.

The announcement came at the heels of the recent disappointments in China‘s economic reports. For one, HSBC’s manufacturing PMI printed at its nine-month low as new export orders fell at their fastest rate in three years. If you remember,China’s exports also missed expectations with only a 1% growth in July while industrial production and retail sales figures showed significant slowdown.

If that’s not enough to spook market players, Chinese Premier Wen Jiabao also warned that exports would continue to struggle as more headwinds are expected in the coming quarter. Yikes!

With all the bad vibes swirling around China’s economic growth prospects, it’s not surprising that government officials are promising stimulus projects left and right.

Tianjin, a major port city northeast China, has committed to a four year plan worth 1.5 trillion CNY to 10 industries. Guangdong, the center of China’s export industry, has also allotted 1 trillion CNY worth of funding distributed across 177 projects. Even Guizhou, which is considered as a poor province, has chipped in 3 trillion CNY worth of investments to boost its eco-tourism and national parks.

Of course, as with every proposal, there are concerns. First and foremost is the question of money. Where exactly will the funding come from? The government has not yet specified exactly where funding would be coming from, which has left a lot of economists and analysts at a loss.

Normally, local government units in China rely on land sales to privately-owned property developers for their funding. But because of the recent efforts to curb soaring real estate prices, land sales have taken a huge hit.

In fact, land sales are actually down by a whopping 25% during the first seven months of 2012 compared to the same period in 2011. In addition to weak land sales, corporate tax revenues have fallen greatly due to recent tax cuts.

Economists are also concerned about the high level of debt among the regional governments. To fund the last round of economic stimulus, most regional government units used loopholes in the system to get around a rule that prevented them from accessing credit markets directly. This has resulted in more than 10 trillion CNY worth of infrastructure projects–projects which yielded very little return.

China’s newly-proposed stimulus program will also be detrimental to country’s aim to rebalance the economy. If you recall, one of the government’s main aims for the next few years is to boost domestic consumption and reduce the economy’s dependence on government-run programs and income from the export industry. Once the stimulus program is implemented, the importance of domestic consumption on the GDP will further be reduced.

In any case, the plan has been set forth, and all that we can do now is sit tight. We’ll just have to see whether the massive public spending can bring about longer-term benefits to China, and to some extent, the global economy.