Cover editorial, issue 394 Nov 17 2008
Original article: [Chinese]

What can 4 trillion yuan do?

While we join the rest of the world in applauding China's grand economic stimulus package, at the same time, we still have our doubts and hope for clear answers.

The package may prevent China's economic growth from slipping below 8%, and it will ease concern over unemployment and other social problems. As the economic crisis spreads, even if China's economic stimulus plan is not a silver bullet, it could be just the right catalyst for needed corrections. The importance of China's role in resuscitating the global economy is irrefutable.

We've seen this before. The package is reminiscent of  China's response to the Asian financial crisis in 1998, when economic growth plunged below 8%. In response, the central government adopted positive fiscal policies and issued RMB 910 trillion in treasury bonds, activating total investment exceeding RMB 3 trillion. As a result, the Chinese economy maintained a growth rate between 7% and 8% during that period.

But there were consequences for the investment fever that struck in 1998. Private capital investment, for example, has remained squeezed by government investment, and market barriers and strict regulation have further impeded its growth.

Another example was the government's vain attempt to increase domestic consumption. No matter how strongly it urged Chinese to consume, they refused. Instead, they deposited their wealth in banks, which led to an annual deposits growth of over RMB 1 trillion over the following several years.

Their choice was understandable - who would freely spend money when housing, education, retirement, and health care were costly, and the economic outlook gloomy?

In 2004, China launched a new round of investment reforms.Though the approval procedure was simplified,the fundamental, government-dominated framework remained unchanged, lest the National Development and Reform Commission (NDRC), China's de-facto macro-policy maker, wouldn't have seen the swarms of visitors who came for a share of the 4-trillion pie that they have recently.

Though official data shows stable growth in consumption, negative factors for consumption still exist today - the new health care reform has just started,  education costs have kept rising, and housing prices remain high.

With that in mind, we hope that this year's stimulus plan will not be a copy of 1998's, whereby the government intensified its economic control, investment system reform was suspended, and private capital squeezed out, though the economy maintained steady growth. Increasing domestic consumption became mission impossible and China's transformation to a consumption economy was impeded again.

These problems may emerge again. Local governments have been keen to develop infrastructure, energy and chemical projects, but don't pay enough attention to investments related to the people's welfare.

Those projects may immediately drive up China's economic growth, but because of this, the economy may also not be able to sever its dependence on investment. To pursue growth this way is to drink poison to quench one's thirst.

External demand and investment is not a lasting solution for China, just as loan-backed, high consumption was unsustainable for the US. There has been a consensus that China should transform its growth pattern and rely more on domestic consumption, but many people tend to deny the costs of such a transition, or they aren't actually willing to bear them.

By comparison, a RMB 4 trillion  investment plan would be more effective. Indeed, it gives first-aid to the economy and restores confidence in the public, and  policy-makers are praised for their resolute decisions. However, we hope this plan results in more than two years of steady growth, though it is the most urgent thing to do at this moment.

But please also keep in mind that be it from taxpayers or private capital, this RMB 4 trillion provides a cushioning platform for China's economic transformation. If we let the economic express of China follow the same old tracks instead of reforming it, we will inevitably face a more dire climate in the future.

This is part of what we should learn from 1998.