China Business Blog and Podcast

Our research manager at Technomic Asia, Frank Tsai, did his undergraduate double major in philosophy and mathematics, enabling him to do, what I call, “thoughtful computation” (as opposed to my liberal-arts-only undergraduate that only qualifies me to be “thoughtful” … oddly, I found there were very few employment trajectories from that skill set).  The maelstrom of numbers swirling about the China economic stimulus plan certainly calls for Frank’s skills in order to separate fact from fiction, so I asked him to blog about the China stimulus plan numbers.  This is what he had to say…

Say what you want about the Chinese authorities, but when they are determined to build something, it can usually get it done fast.  Go to a rural township one year and it’s a patchwork of dirt roads and asphalt.  Go there the next year, and not only are all the roads paved, but they’re lined by trees of all the same breed, shape, and height.  Ask around, and a peasant points into the distance and says that the government “uprooted all those trees from that mountain over there” (behind that river, across that valley!).  The irony of a lush roadside next to a naked mountainside is not addressed.

Pundits in the U.S. applaud the billions in infrastructure investment in Obama’s stimulus plan, but keep in mind that at 10 to 20 times the wages of those peasant tree-movers, we’re getting a lot less investment bang for our stimulus buck.  This has been the “miracle” of China’s breakneck infrastructure development (wowing first-time travelers to China, serious business people and casual tourists alike) in miniature: cheap labor.  Combine this with the “P&L impact” of the China stimulus plan we blogged about the other day, and it makes for some potentially interesting outcomes.

Given the easy mobilization of unskilled labor in China, to say nothing of China’s lack of pesky checks, balances, and legislative mud-fights, it stands to reason that their $586 billion stimulus plan is getting off the ground much faster and with much greater effect than all of the “shovel-ready” projects in Obama’s stimulus plan.  So, how fast has it been going?

According to the Chinese government, $57 billion (or one-tenth of the total stimulus) has already been spent as of the end of 2008.  Of this…

• about 69 percent ($39 billion) has been spent on rural infrastructure, roads, railroads, and housing construction
• an astonishing $90 billion has been budgeted for next year to more than double China’s rail network over the next decade, adding 25,000km of track
• construction has already started on a $13 billion gas pipeline from Xinjiang to Shanghai, and there are plans to start building at least four nuclear power plants this year.

As a result of these and other mega-projects, Yangtze River cargo throughput of steel, coal, and cement ticked up in January after suffering declines since last August, despite steep declines in manufacturing production.  Clearly, the stimulus is already affecting the real economy.  And, we would venture to say, its effect will be an order of magnitude greater than the $400 million for highway overpasses and upgrades in Kansas, or the proposed $3 billion just for a four-lane tunnel in downtown Seattle (Ed note: not that one might NOT want to be high above Kansas or far below Seattle!).

Aside from basic infrastructure, China’s stimulus will be spent in a variety of other ways, some familiar in the U.S. and others not so familiar.  Ten industries have been designated as stimulus beneficiaries: automobiles, steel, textiles, shipbuilding, petrochemicals, light industry, electronics, nonferrous metals, equipment manufacturing, and logistics.  Some will benefit from consumption subsidies, such as 13% off for peasants to buy mobile phones, computers, and home appliances.  Others, such as textiles and light industry, will get bigger export tax rebates.  Almost all of the industries will benefit from government commitments to invest in innovation and new technology, with multi-billion dollar funds already announced for the auto and steel industries.

The government is also taking industrial policy one step further, guiding consolidation in the fragmented auto and logistics sectors, and getting rid of excess capacity in steel, metals, and equipment manufacturing.  Industrial policy is not always spending per se (and it is important to keep in mind that the Chinese term for the stimulus, 振兴计划 (zhenxing jihua) or “rejuvenation plan,” does not necessarily imply spending), but China is clearly committed to a degree of market guidance that the Obama administration, even with rumors of bank nationalization, would never touch.  The Chinese authorities are thinking of the global crisis as an opportunity to enhance their industrial competitiveness.

So, it’s never surprising that things are built fast in China, and the ambition of government planners has never been in doubt – but how much of what has been announced is really part of the stimulus, and not accounting magic?  We’ve all heard in the Western press that a big item in the stimulus is “earthquake reconstruction,” which clearly would have gone forward regardless of the financial crisis (though at a slower pace).  It’s easy to suspect that some big-ticket projects and industrial policies are “piggy-backing” on the stimulus to give their proponents bureaucratic momentum, thus greatly exaggerating the headline figure of $586 billion.  When the government officially allocates only $23 billion to “industrial restructuring” while sources from within various departments announce stimulus spending whose total far exceeds that amount, we know that something fishy is going on.  Despite the anemic pace of U.S. stimulus spending, there might yet then be something to be said for our own small-bore, yet essentially transparent approach.

This entry was posted on Tuesday, March 10th, 2009 at 5:19 pm and is filed under China, culture, economy, government, guanxi, stimulus plan. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.