China and Dubai

Cautionary Tales: China and Dubai 

The Australian economy has not felt the full force of the Global Financial Crisis in part because of the stimulus package in China. Whatever good the Chinese have done so far as their own economy is concerned, they have underpinned our own growth rate here. 

The size of the stimulus package introduced in China is truly astonishing. These are some of the specifics noted by Professor Yu Yongding in November in a presentation to the Productivity Commission: 

“In November 2008, the [Chinese] Government introduced a Rmb 4 trillion stimulus package for 2009 and 2010. The prescribed dosage of the stimulus is very large, at 14 per cent of GDP in 2008.” 

The rest of us are as nothing compared with that kind of spending. I myself don’t know how the Chinese work these things out and how market forces are allowed to shape economic outcomes. A stimulus package of 14 per cent of GDP is beyond the beyond. But there’s more: 

“Since 2009, the People’s Bank of China (PBOC) has adopted a very expansionary monetary policy to support the expansionary fiscal policy. In the first half of 2009, bank credit increased by 7.3 trillion RMB.” 

It’s only arithmetic, but if 4 trillion RMB is 14 per cent of GDP, then 7.3 trillion RMB is 25 per cent of GDP. Thus, according to Professor Yu – who after all is a former member of the Monetary Policy Committee of the People’s Bank of China and therefore ought to know – bank credit in a single year increased by an amount equal to one quarter of the entire level of China’s national output. 

How many thoughts enter my head about such a diversion of resources within an economy? As it happens, many of the same thoughts have entered Professor Yu’s head as well. He lists five problems, all worthy of serious consideration, that the Chinese Government will have to deal with as a result of its stimulus package: 

1.      Chinese overcapacity, which already exists in vast areas of the economy, “will become more serious in the future”. 

2.      “China’s investment efficiency has been falling as a result of the stimulus package…. The fall of investment efficiency will have an important negative bearing on China’s long-term growth.” 

3.      “Infrastructure investment is long-term investment and will take a long time to create revenue streams”. [An issue of massive importance to us here but an issue of no concern to a standard issue Keynesian.] 

4.      “The over-enthusiasm of local governments for local investment may worsen China’s fiscal position in the future in an unexpected and dramatic way…. As a result of the particular institutional arrangements in China, local governments have an insatiable appetite for grandiose investment projects. Investment led by local governments is likely to lead to a sub-optimal allocation of resources.” [Putting it very mildly. Why does this remind me of Australia?] 

5.      “China’s monetary policy is too loose…. Anecdotal evidence shows that a large chunk of excess liquidity has entered stock markets and real estate markets. Asset bubbles are returning with a vengeance.” [More again of the Australian story?] 

Given the numbers, these are trends that should worry anyone. It should worry the Chinese, and in the longer run, it should worry us here. If the Chinese do not get this right, the problems for us all will be large, almost incalculable. 

But that is for another day. In the meantime, the ability of the Chinese to maintain their levels of expenditure appears almost inexhaustible. But it is not, and that is why there is a need for them to get these things right. 

The story in Dubai is in itself a reminder that public spending programs are not the certain way forward for any economy that seeks full employment and rising prosperity over the longer term. In Dubai, a seemingly inexhaustible supply of petro-dollars supported an massive program of domestic expansion. Here is a little tale that captures the whole: 

“A few years ago, an adviser went to Sheik Mohammed bin Rashid al-Maktoum with a plan for a tall office building. ‘Only 90 stories?’ the ruler of Dubai asked. The aide was sent back to the drawing board, with instructions to design the highest structure not just in Dubai, not just in the Middle East, but in the world. When the Burj Dubai has its grand opening in January, it will be an 818-meter monument to the visionary autocrat who dreamed the Dubai dream — and, as it turns out, a conspicuous symbol of the hyper-ambition that now threatens the emirate with financial ruin.” (Time 1/12/09) 

Badly directed public spending is a curse that has brought down many an economy in the past. The example of Dubai, whose expenditures began well before the Global Financial Crisis set in, ought to make governments think about their own expenditure programs. 

Governments do not know how to spend money productively. They have no idea what will add value. They are mesmerised by the vast sums of money put at their whim and disposal. Visionaries to the core, they are the potential ruin of any economy in which they are able to run their fiscal experiments. 

“Governments have an insatiable appetite for grandiose investment projects”, as Professor Yu so nicely put it. 

“Infrastructure investment is long-term investment and will take a long time to create revenue streams” he added. 

The Chinese seem to understand these things. Do we? 

Reference: Yu Yongding. 2009. “China’s Policy Responses to the Global Financial Crisis”. Richard Snape Lecture, 25 November 2009. Melbourne: Productivity Commission

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