Understanding China’s stimulus

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The US News website has a great interview with Edmund Harriss, a comanager of the Guinness Atkinson China and Hong Kong fund:

To what extent is the Chinese government unwinding its stimulus efforts?

I would put it as sort of adjusting rather than unwinding. I think unwinding is probably a bit strong. They are still proposing to allow new loans of about $7.5 trillion [yuan] to go into the economy [this] year. That is certainly lower than the $9.5 trillion that came in during 2009, but is still very good growth. … What they are a bit concerned about is the pace of lending that was achieved in 2009, were that to be replicated in 2010, would in their view lead to issues related to too much liquidity, asset-price inflation, wasteful allocation of capital. … And so what they’re trying to do is just apply some brakes to that new lending. We got off to a racing start in the first two weeks of January, which was looking like a rerun of 2009, and the central bank … applied the brakes. But it is noticeable that China is not unwinding its stimulus package inasmuch as those incentives for consumers—such as to buy cars or to buy consumer durables or for people buying their first homes—all of those incentives are still in place. … The way I read it, the Chinese know that the economy still needs support, that the individual consumer needs more support, but [think] that in areas—particularly … where there is already plenty of cash and where that’s starting to turn into speculation—they can have some of these incentives withdrawn. And that’s what I see going on.

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And you think that this pattern will hold true throughout 2010?

Yes, I do. I think that there’s certainly no appetite to put growth at risk. The fundamental issue—why China put in the stimulus package in the first place—is that they need the kind of growth that creates jobs. And for job creation to continue, they clearly need to sustain growth in the big employers—and that means basically heavy industry and construction, because that’s where you’re going to get the income growth. And they [also need] to try to unlock some of the household savings that have built up in recent years as individuals have increased their precautionary savings to deal with unexpected items like hospital treatment. So they’re trying to tailor policies to keep private consumption moving as well as to keep job creation on track. And I think it’s just the case that when they really threw everything at the economy to get it moving, that has done its work. Now is the time to take some of that froth off. But it’s a problem really that’s going to be faced by all governments, which is sort of how to withdraw the stimulus without triggering the very thing that you’ve sought to avoid. But China has achieved such extraordinary domestic growth in the past year that they can afford to move earlier. But it is not a clampdown in my view. What I think we’re going to get, though, is there is always uncertainty when policy changes or when there are adjustments to policy, and I think it’s going to be a little stop-start as expectations both inside China and outside China adjust to the idea that it’s not a free-for-all ad infinitum.

Does any of this give investors a good reason to re-evaluate their positions in China?

No, I don’t think it does. I think what it does is that it should encourage investors to view the Chinese growth story as one that can be sustained. Whereas I think if they weren’t making the changes that they are now, there would be every prospect that 2011 would see a bust, would see a painful drop in the rate of growth as China really did have to apply the brakes hard. I think they’ve moved a lot earlier than folks were expecting by moving in the middle of January rather than waiting for, say, the second quarter of the year. Chinese policymakers have proved in the past to be quite quick to move to try to head off the kind of excesses or bubbles that we’ve seen in China’s economic past.

The rest is certainly worth the read.