How Large Is the Stimulus Really?

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Four trillion yuan over two years translates into roughly 6 percent of GDP per year. So one might have expected the central government’s recent stimulus package, which is nominally this large, to have increased the state’s deficit by at least this much. It did not. Instead, China’s is running a deficit of barely 3 percent.



Why is this? And how large is the true stimulus? The quick answer to the first part is that the central government is relying on banks to finance much of its stimulus package. However, calculating the total size of stimulus spending is much more difficult, as it is not possible to tell precisely how much bank lending targets stimulus projects – which is one of the big downsides to the current plan.



It was clear from the start that not all of the stimulus package would be funded by the government. In fact, of the 4 trillion yuan, the central government only budgeted about 1.2 billion yuan from its own coffers, breaking down to 104 billion yuan in the fourth quarter of 2008, 488 billion in 2009, and the rest in 2010. Combining the first two installments, which should both be felt this year, adds up to just over 590 billion yuan, or 1.8 percent of 2009’s expected GDP.



The 300 billion the Ministry of Finance has put toward tax and fee cuts since the fourth quarter of 2008 will cost another 0.9 percent of GDP. Another 0.3 percent of GDP is going toward increased social spending. The tally of all three comes out to about 3 percent of GDP.

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Local governments are supposed to supplement this amount, but by law they are not allowed to run a deficit or borrow. Moreover, the 200 billion yuan in bonds that the central government is issuing on behalf of local governments will barely cover the latter’s revenue losses. However, local governments are expected to spend more, which leads to our key question: How large is the overall stimulus really?



The true size of China’s stimulus can not easily be measured by fiscal spending or changes in the government deficit. As we have argued previously, much of the 4 trillion yuan will come from banks, and that includes much of the local government’s portion. Banks have reportedly been asked to issue long-term loans – with an expiration of more than 10 years – to local government entities to invest in infrastructure projects.



There have been numerous reports and estimates about the size of local-government investments – some say they are as high as 18 trillion yuan. Since local governments do not have even a fraction of the resources needed to finance these projects, we suggest investors focus on bank lending. Whatever ambitious investment agenda the local governments may be pursuing, we will see it in increased bank lending rather than in fiscal stimulus size.



Of course, to the extent bank loans are lent to local governments for public investment, they are really quasi-fiscal spending and should be considered part of the fiscal stimulus. It would have been more transparent if more of the stimulus-related spending showed up explicitly in the budget.

飞雪寒冰

The government has decided to limit its deficit to 3 percent, while placing no obvious limits on bank lending. By doing so, the government has decided to rely on banks to fund much of the stimulus. Chinese banks happen to be in a good position to do so after a costly recapitalization and restructuring a few years ago, and more recently, after their loan to deposit ratio dropped. However, we think quasi-fiscal lending also carries downsides.



To be clear, we do not necessarily think that most of the bank lending in the coming years will be quasi-fiscal lending, as opposed to lending to the market sector. Neither do we think that much of the new loans will necessarily become non-performing loans eventually burdening the government. Rather, the main problem with relying on banks rather than incurring a larger explicit budget deficit is one of transparency.



Relying on bank makes it less transparent how much spending takes place in relation to various stimulus projects. As mentioned, it is difficult to know exactly how much of a bank’s loans will be quasi-fiscal as opposed to commercial. Nor is it simple to discern what projects it is financing. A larger explicit government deficit will at least face the scrutiny of the National People’s Congress, and public opinion would likely have led to more spending on social safety issues rather than investment.



Another downside is that it makes banks balance sheet less transparent. If banks are relied on too heavily, it could hurt their balance sheets, their reputation, and investor confidence.

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