Arab Today, arab today different kind of stimulus
Last Updated : GMT 08:53:10
Arab Today, arab today
Arab Today, arab today

Different kind of stimulus

Arab Today, arab today

Arab Today, arab today Different kind of stimulus

Beijing - XINHUA

Investment by local governments needs to focus on boosting development of less developed central and western areas Some local governments' recent announcements of major investment plans have given rise to the concept of a "local stimulus". The central authority's review and approval of a number of major investment projects have given the green light to some massive local investment plans. For example, Guizhou province in Southwest China and cities such as Ningbo in Zhejiang province, Nanjing in Jiangsu province and Changsha in Hunan province, have all rolled out long-term investment programs to boost local growth. However, these local stimulus projects are completely different from the 4 trillion yuan (about $628 billion) stimulus that was rolled out by the central government in 2008 to ward off the impact of the global crisis. In 2008, besides key investment projects supported by public finance, relaxed housing market credit policies and tax policies pushed up GDP through a real estate boom. Moreover, with bank credit interest rates declining sharply and the offer of excessive preferential housing mortgage interest rates, bank credit expanded drastically. From 2009 to 2011, the bank credit volume increased by 25 trillion yuan, while the whole social financing volume reached more than 46 trillion yuan. In this context, how could house prices not soar? As the central government has reiterated the importance it attaches to resolutely curbing rising property prices, there are no policy conditions that will enable any local stimulus to inflate real estate bubbles. Despite the sign of loosening monetary policy, the speed of current credit expansion is far lower than that in 2008. This along with the recent change in the interest rate regulation mechanism and commercial banks' attention to risk control mean a new round of excessive credit expansion is unlikely to occur again. With credit limited, it will be difficult for local governments to inflate real estate bubbles, so the flow of their investment will change direction. This time it is mainly not developed regions, but underdeveloped areas, such as Guizhou, that have unveiled massive stimulus programs. And, the investment will mostly go to projects involving people's livelihoods, integrated traffic systems, industrial development and urban infrastructure. For the central and western regions of China, backward infrastructure to a large extent has contributed to slow economic growth. So local governments' increased investment in these areas can lay the groundwork for the long-term stable growth of local economies in the long run. For example, the population of Zheng'an county and Tongzi county in Guizhou province and Jianhu county in Jiangsu province are almost the same, about 800,000 each, but their annual fiscal revenues are quite different. The annual revenue of Zheng'an is only 140 million yuan, while for Tongzi it is about 400 million yuan. For Jianhu, however, it is 4 billion yuan. There is a huge gap in economic development not only between coastal areas and inland areas, but also between two neighboring inland counties, such as Zheng'an and Tongzi. The fundamental reason is that Tongzi is a transport hub of Guizhou while Zheng'an is in a mountainous area without convenient logistics. The traffic conditions in Tongzi are better, so its economic development level is higher. Jianhu county, as one of the country's major bases of machinery for the oil industry, is even more developed. If the infrastructure of the two counties in Guizhou can reach the level of Jianhu, then local economic development will be considerably speeded up. If the central government can increase investment in the infrastructure of the central and western regions, it will lay the foundations for the long-term stability of local economic development. So government investment needs to focus on economically less developed regions, such as Guizhou, Jiangxi and Hunan, with good natural conditions. Of course, for those areas with harsh natural conditions, which are not suitable for human habitation, the economic effect of huge government investment would be very limited. The government needs not to invest heavily in these areas, especially in their infrastructure. Therefore, we should not simply give a negative or an affirmative judgment on eye-catching local stimulus projects, but analyze them in accordance with the different conditions in different areas. For those backward central and western areas with good natural conditions, the central government can increase direct fiscal transfer payments and use some special policies to encourage and support local infrastructure construction so as to lay the foundation for local long-term economic growth stability. For economically developed areas, the government should bring private capital into play under effective government regulatory rules. As long as more funds flow into the real economy and into infrastructure that can ensure future economic long-term steady growth rather than real estate, local stimulus can become the driving force for China's future economic growth. But we should be aware that local stimulus projects are partly driven by local governments eager to produce "achievements" and some government officials' impulse to expand investment for their own gain. It should also be noted that the investment boom is likely to bring huge financial and bank risks. But if the government can guide this local stimulus effectively, the investment can be a new starting point for the economic growth of the country's less developed areas.

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