October 8, 2018 / 5:36 AM / 2 months ago

Beijing’s $175 bln boost raises stimulus conundrum

A woman walks past the headquarters of the People's Bank of China (PBOC), the central bank, in Beijing, June 21, 2013. REUTERS/Jason Lee/File Photo

HONG KONG (Reuters Breakingviews) - China’s latest cash boost tees up a stimulus conundrum. The central bank said on Sunday it plans to pump another 1.2 trillion yuan ($175 billion) into the financial system. Despite the debt hangover from its last spree, the country does need to invest more in green technology, healthcare and education. Economically, it has some time to plan spending wisely too. Beijing’s haste, however, risks a lot more waste.

The move, announced before markets reopened after a week off, marks the fourth time this year that the People’s Bank of China has reduced the reserve requirement for lenders, the amount they must hold as a percentage of deposits. This should help them offset the balance sheet impact of bringing hidden bad debts onto books. It is also intended to encourage more lending to small companies, and more infrastructure bond purchases being rushed to market by local governments. 

Monetary easing is a natural reaction to trade tensions. World Bank data shows net exports of goods and services still made up a fifth of China’s GDP in 2017. President Donald Trump’s tariffs also landed on top of a regulatory campaign to crack down on pockets of excessive risk-taking that had already battered Chinese banks and financial markets. With stock markets falling and anxiety rising, officials have moved fast to keep interest rates down, cut taxes - and spend.  

    The country still has plenty of inefficient coal plants, polluted waterways, and under-educated people covered by inadequate healthcare. The Asian Development Bank estimated in 2017 that China needs to spend $753 billion per year on infrastructure from 2016 to 2020, which excludes spending on climate change mitigation.

    The challenge is managing the pace. China’s economy is in far more robust shape than 2008, when Beijing cranked out a $580 billion stimulus plan to stave off collapse. This time the need for liquidity is less urgent, and growth is slower, making it tougher for the economy to digest trillions of yuan getting dumped into the system at tight intervals. 

    There’s also a dearth of projects that produce quick returns. Environmental cleanups and raises for teachers are great, but their economic benefits take time to appear. Bureaucrats, ordered to stimulate in a jiffy, borrow and pour cement. That will be tough to resist.  

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