S&P eyes China stimulus risks

Last Updated: Wed, Aug 22, 2012 09:27 hrs

China can afford to deliver a fiscal stimulus for its sagging economy, but would risk making bad investments, ratings agency Standard & Poor's said on Wednesday as Chinese media fuelled speculation that a fresh spending boost was on the way.

In its new report, S&P said a mountain of debt left behind by a stimulus package that helped China fend off global recession four years ago has curbed Beijing's appetite for a big stimulus this time round.

"Inefficient spending can impair China's future growth trend," the report said. "It could also deepen the damage of the last round of stimulus spending by further weakening the balance sheets of governments and commercial banks and raising future financing costs across the economy."

S&P's comments came as local media reported that Tianjin, a port on the northeastern coast that was one of China's two fastest growing cities last year, was planning a multi-year investment programme worth $236 billion.

Though it is equivalent to around 150 percent of the city's annual economic output, the only reference to the plan was a newspaper article on the city government's website saying it exists.

The 1.5 trillion yuan plan envisages spending in 10 major sectors including petrochemicals, port equipment, new energy cars, and aerospace industries, yet a spokesman for the city government contacted by Reuters denied any knowledge of it.

There were no details of where the cash would come from or if it was in addition to sums already committed in official five-year economic plans.

A day earlier there were reports that the southwest city of Chongqing will also invest 1.5 trillion yuan into seven industries over the next three years. Several Chongqing officials also said they did not know of the plan.

Last month media reported Hunan's Changsha city had launched a 829 billion yuan investment program, though there has been nothing official on the local government's website since.

The reports have met with skepticism among analysts, and for all the hopes that the central government will deliver a fiscal stimulus, they warned against expecting too much at this stage.

The Chinese media has reported on a string of ambitious investment plans in the past month - including Wuhan, Ningbo and Guizhou - feeding talk that China is readying a giant government spending scheme to lift an economy mired in its worst downturn in three years, forecast to see growth cool to a 13-year low of 8 percent in 2012.

"You look at the size of some of these stimulus announcements and it is quite clear it is almost impossible they will all be brought to fruition," said Alistair Thornton, an economist at IHS Global Insight.

Many analysts suspect the Tianjin plan and the others may be no more than verbal intervention to boost market confidence.

"To a large extent, they are just plans, or more detailed plans to five-year plans," said Ting Lu, an economist at Bank of America-Merrill Lynch, referring to five-year economic blue-prints that China uses to chart its growth path.

"It's not stimulus as defined by Wall Street."

Indeed, many of the industries recently highlighted by local governments as areas of investment are those outlined in their five-year plans, making it hard to tell if recent investment pledges are indeed new.

And even if local governments were to attempt to bring-forward spending to lift economic growth, they will need approval from Beijing, as it controls the reins of bank lending and has the last say on any big project, said Lu.


China rescued its economy from a prolonged global recession in 2008/09 by rolling out a 4 trillion yuan investment stimulus.

But that left 10.7 trillion yuan worth of debt racked up by local governments to meet obligations under the national plan.

Analysts reckon a third of that may never be repaid, saddling the state-directed banking system with a sack of sour loans.

China's central government meanwhile is clocking up tax receipts at record levels and can easily expand the tiny 1.5 percent of GDP it has budgeted as a fiscal deficit for 2012.

But the debts sitting in opaque local government financing vehicles are one of the key risks spooking investors in China and speak volumes about the funding constraints for fresh city or provincial level borrowing.

Worse, revenues from taxes and land sales, the two main sources of income for local governments, have also slipped as China's economy cools, said Thornton from IHS.

The confluence of factors makes normal government spending difficult, let alone extraordinary expenditure, he said. So large investment plans are best interpreted as jockeying by local governments for a slice of Beijing's funding to support major sectors, if and when it is handed out.

"They are best viewed as an opening gambit from the local government," said Thornton. "You are ask for five things and you might get two."

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