Not about the money

The last thing China’s economy needs now is another giant stimulus package. Premier Wen Jiabao has raised investors hope for a policy U-turn by saying that growth deserves more attention. But Beijing shouldn’t panic this time. Unlike in 2008, there are no massive job losses threatening stability, and still too much money sloshing around from the last stimulus. Structural reforms are the right remedy. China’s economy is at its coolest level in three years. First-quarter gross domestic product (GDP) growth at 8.1 per cent was the slowest since mid 2009. The World Bank has cut its forecast for 2012 GDP to 8.2 per cent. China’s three growth engines — fixed investment, exports and consumption — are all losing steam. Fixed asset investment grew 20 per cent year on year in April, the slowest since 2002.

Still, employment has been surprisingly resilient. The official unemployment ratio has remained at four per cent since late 2010. The country added 12 million jobs in 2011, exceeding the nine million goal, even after 10 per cent annual minimum wage increases in the past few years. As China’s population ages, there is less need to grow as fast as before to absorb new workers coming into the market. China’s working population will stop growing in 2013, according to China Social Science Academy.

Moreover, there is a growing consensus on the side effects of a monetary stimulus — which would probably mean getting banks to lend more. Inflation dropped to 3.4 per cent in April, but faces upward pressure as Beijing liberalises energy prices. Asset prices could also rise. House prices are continuing to climb in around a fifth of Chinese cities. The system is still coping with the last round of stimulus. China’s central bank was responsible for half of the new creation of “M2” money globally in 2011, according to Standard Chartered.

True there is room to give domestic demand a small boost, but this can be done through reforms rather than spending. On the investment side, Beijing is likely to push forward key infrastructure projects, especially in the underdeveloped west, to resolve logistics bottlenecks. Speeding up the modernisation of state-controlled sectors like railways, and breaking up remaining monopolies like healthcare, would help unlock potential demand. There’s no need yet to throw money at the problem.