China's stimulus a test of reform resolve

CHINA has responded relatively swiftly to a perceived crisis in its economy that caused stocks to plunge to multi-year lows two weeks ago. The authorities unveiled a mini-stimulus package on Wednesday night to prevent the economy from decelerating too fast, even as it pushes ahead with reforms to deflate its debt excesses and liberalise its financial system. Markets cheered the move. But attention is likely to return to China's bad debt problem, which is expected to worsen as more companies default.

What is striking about the latest measures is how limited they are in scope while meeting three critical needs: promoting social equity, preserving jobs, and spurring demand-boosting urbanisation. Borrowing hundreds of billions of yuan to build railways will create jobs, spur consumption and promote urbanisation by further linking up the less-developed central and western regions. Bigger tax breaks for small businesses will give relief to those facing cashflow problems and struggling from a lack of available credit. Small businesses are critical in providing jobs, and they need all the help they can get as the economy slows. Spending more to clean up slums and upgrade poorer and more rundown urban areas will be good for Beijing's image. It is all too aware of the need to manage a growing middle-class population disillusioned by soaring inequality, food scares, environmental problems, a lack of opportunity and entrenched corruption.

The latest stimulus is relatively restrained compared to the four trillion yuan (S$813 billion) package rolled out following the global financial crisis in 2008. Policymakers might have more tricks up their sleeves to buy themselves time even as they tackle bad debt. More money can be spent cleaning up pollution or building more subways. With unemployment at just over 4 per cent, there is room for slower growth. More importantly, China is not excessively indebted to the world, so it is not in danger of foreigners pulling the plug. Investors justifiably worry whether China's banks will go bust from their exposure to bad loans. As the economy slows, more borrowers will be unable to repay their debts. But there is always scope for a glass-is-half-full approach. Investors should not underestimate China's capacity to effect a soft landing. Instead of worrying about whether growth this year is 5, 6 or 7 per cent, investors should assess whether policymakers will stick to their reform plans when the going gets tough.