Thursday, November 20, 2008
Who is getting the money?
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Victor Shih | Nov 20, 2008
More details have emerged about the 4 trillion stimulus package that China has rolled out. The main questions remain: who will get the money? How will it be spent? In a revealing article published the 21st Century Economic Herald (my favorite), reporter Wu Hongying gives a detailed account of how Chongqing (a provincial unit controlled by princeling Bo Xilai) plans to spend the money. I believe the situation faced by Chongqing is similar to that in many Chinese cities and provinces. Basically, Chongqing SOEs, which focus on land holding, real estate, electricity, and financial services, are in deep trouble. Land prices in Chongqing have fallen by over 70%. The electricity group is in the red by about 250 million RMB. The debt asset ratio for the 8 major SOE groups in Chongqing has risen to 72%. No details are given about the financial holding companies, but considering that their main role is to inject capital in the other SOEs, they can't be doing too well either. Things are not pretty, and the well off SOEs have to inject capital in the problematic ones.
So, the central government rolls out a 4 trillion stimulus package. As I pointed out in the last note, only a part of the money will be from the central government, but at this point, local governments are desperate to get this part. Thus, a massive fraud whose working and purpose are perfectly clear to all the players involved is perpetrated. Basically, local governments propose projects which may or may not be implemented with the sole purpose of receiving central funding and "supplementary" (peitao) bank loans from the state banks in order to stave off the bankruptcy of local SOE groups, which are heavily indebted at this point. The local "self raised" part of the capital can be a piece of idle land or a redundant factory. The excuses are many, but both the local and the central governments know that the center and the banking system must give a large chunk of money in order to prevent (delay?) massive bankruptcies of local and a few central SOEs. As for Chongqing, it has applied for 20 billion in investment before the end of 2008 (out of the 100 billion announced by the NDRC for China as a whole). Almost all of the money will go toward large SOEs in Chongqing. Due to Bo's political connections, Chongqing will probably get at least 5-10 billion, thus staying solvent for some time.
Similar to the US bailout, this Chinese bailout prevents (delays?) the mass bankruptcy of provincial and municipal state owned enterprises. If these entities go bankrupt, the unemployment impact would actually be moderate since the state sector only employs around 30% of the urban work force now. Bankruptcies would also cause a huge problem for state owned banks which have lent heavily to these SOEs (especially China Development Bank). However, China has plenty of resources with which to recapitalize banks. The real reason for resuing local SOEs is political--their bankruptcy would cause an upheaval (perhaps THE political upheaval). Without these entities, local officials would be completely reliant on central money and would have many fewer rent-seeking opportunities. Given the low salaries of Chinese officials (13,000 bucks for provincial governor?), they would have much weaker incentive to be loyal to the regime. Even if the 4 trillion brings little stimulative effect, rent must be preserved for provincial officials for this reason. Of course, like the US bailout, the Chinese bailout only buys time. Given that many state owned groups bet heavily on the real estate market recently, I suspect that more bailouts will be needed in the near future. In the near future at least, the Chinese budget can handle these costly, but necessary bailouts.
南方报业新闻 时间: 2008年11月21日 来源: 21世纪经济报道
本报记者 吴红缨 重庆报道
Friday, November 14, 2008
A Tour of the Stimulus Package and Beyond
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Victor Shih | Nov 13, 2008
A lot has been said about the 4 trillion RMB "stimulus package" already. As a China specialist, I will just go over some details on how it is likely to be carried out and its implications.
First, a brief primer about state directed investment in China, the core of the forthcoming package. Usually, the central government sets a ceiling on large fixed asset investment projects. If a local government wants to build a port somewhere, even if it is doing so entirely with its own money, it has to receive National Development and Reform Commission (NDRC) permission to do so. If it is a state sponsored project, which means it is part of the five-year plan (yes, those still exist), a project can lobby the NDRC for central funding. However, even if that were the case, the majority of the financing typically comes from local government (or SOE) self-raised capital and bank loans. Thus, the 4 trillion is not all central government money; the majority will come from local budget and bank loans.
Traditionally, such government project financing benefits rich localities which are more able to put up part of the financing. The NDRC would like to approve as many projects as possible, especially now due to political pressure from the top, so they like localities with clear plans and a large chunk of the financing. Thus, a lot of the central money will be distributed to coastal areas and provincial capitals. It is possible that due to the tight cash situation of many local governments, the share of central money would increase in this round. Regardless, bank loans will be a large part of it, and the removal of credit ceiling makes sense in this case. Typically, once a project receives the NDRC's seal of approval, banks are more than happy to lend since it basically receives a government loan guarantee. That has caused some NPL problems in the past, and will likely cause problems in the future.
On to other issues. There is a rumor that Chinese Academy of Social Sciences, a government think-tank, came up with a plan to set up a government fund to buy up Chinese stocks if the market falters drastically. The argument is that since the total market capitalization is only like 930 billion RMB, a fund of 6-800 billion can "save" the market. I think this suggestion is quite problematic. First, it would of course reverse decades of reform, which aimed at making firms more responsible for their own well-being. If the state buys up shares, large firms will simply revert back to state owned enterprises (well of course the US now has plenty of those as well....). Second, if the stock market is allowed to continue, then it will operate under the sword of Domicles as participants wonder when the government will sell the shares back to the public. That was the situation for a long time in China due to legal-persons shares and was the source of a prolonged bear market. Finally, the largest companies are also listed in Hong Kong and New York. Would the Chinese government mobilize CIC to buy in those markets?? What a way to spend one's foreign exchange reserve! In any event, I don't think there will be enough political will to carry this out due to potential charges that this is used only to bail out the rich, which runs counter to Hu Jintao and Wen Jiabao's populist agenda.
In the mean time, the situation in the housing market is only going to get worse since part of the stimulus package seeks to drastically increase the supply of public housing, thus sucking demand away from the lower end of the private housng market. On top of that, slowing export is finally hitting the banking system. The vice head of the Guangdong CBRC recently revealed that loans in Guangdong to the textile sector is now nearly 30% NPL. With the global slow-down continuing, the situation is only going to get worse in places like Guangdong, Fujian and Zhejiang. Fourth quarter may still look okay, but I think we will see some interesting data for 1Q next year.