For Responsible Stimulus Policy

Editorial, issue 397 Dec 8 2008
Original article: [Chinese] 

China's State Council decided on nine new financial policies to boost the economy on Dec 3, just weeks after announcing a four-trillion-yuan stimulus package. 

Todate, related counter measures for preventing a slide in the economy included ten measures to boost domestic demand, the four-trillion-yuan investment plan between 2009 and 2010, and the four big cuts in interest rates and deposit requirement.

The ongoing Central Economic Work Conference, which will last until this Wednesday, will work out even more plans to ensure future economic growth. 

It's essential for the government to launch economic stimulus measures when China's economy is seriously challenged by the global financial and economic crisis. However, we believe it's necessary to keep in mind the long term risks of economic stimulus. Without necessary attention to such risks, these measures may leave trouble to the future despite their short-term effects. 

We believe consideration should be given to the economic efficiency of the investment to be made as well as its social efficiency, such as improving public facilities and services. Except for those solely government-invested projects, others, as long as they involve corporate funding and bank loans, should give top priority to economic benefits.

Among the RMB 4 trillion package and over RMB 10 trillion investment that local governments plan to make, most funds will come from companies and need support from bank loans. If these funds have low returns, they will for sure result in losses to companies and bad debts to banks. They may help to enhance the economy in the near future, but will also have long term consequences.

To stimulate the economy with investments, many policies suggest or outright require banks to provide more credit support, including cancelling credit limits for commercial banks, cutting deposit requirement, and permitting policy banks to extend extra loans of RMB 100 billion before the end of 2008.

These urges were positively received by banks. Some signed a RMB 600 billion loan commitment with several local governments within one week. Others announced to increase loans by tens of billions before the end of the year.

Senior banking professionals pointed out that by this point of the economic downturn, the banking industry has accumulated considerable potential bad debts as some companies went broke and most big ones suffered losses. They said the impacts of such debts would gradually emerge in 2009 and banks would have much worse performance.

The central bank's interest rate cuts recently have narrowed interest margins greatly. Since margins are the major source of income for domestic banks, their ability to make profits would decrease. As the economy continues to falter, banks will have a really tough time. 

We think it's very important to provide more loans to support the economic stimulus package; however, facing unprecedented challenges, China's banking industry needs to examine and control risks. If blindly following the policies and neglecting the returns of the loans they offer, they will likely be saddled by non-performing loans. In that case, financial risks, which China has just begun to solve in the past years, will likely strike once again.

Therefore, watching long-term risks should be of the same importance as stimulating the economy. Policy-makers at all levels should encourage banks to provide loans to highly profitable projects, while government funding should be the major source for those social welfare projects. Only in this way can the positive fiscal policies and moderately loose monetary policies take effect.