By Dr Carmelo Ferlito
CEO – Center for Market Education (CME)
Voluntary Advisory Board Member – ITALCHAM Malaysia
China unveiled a further expansion to the stimulus package announced last September; measures are aimed at supporting domestic aggregate demand. Because of a very sluggish investment dynamics, the government will ramp up special treasury bond issuance to support equipment renewal. The support will take the form of investment subsidies and interest subsidies for equipment renewal loans.
The measures are trying to push the country to achieve the target of 5% economic growth (as measured by the Gross Domestic Product, or GDP) in 2025. However, the measures reveal two major issues from a policy perspective. The first one is that just the aggregate matters (for them): the important thing is to get that 5% at the end of the year, no matter how it is achieved. However, GDP could grow thanks to massive government spending financed with borrowing: the statistical target will be achieved, but it will be paid with higher debt and inflation, so higher costs in the future years.
The second issue is that stimulating aggregate demand produces only temporary effects: while expanding production and consumption in an artificial way, general positive effects are created that can be maintained only through endless stimuli, in turn generating unsustainable price pressures: the structure of the economy is not changed, it gets drugged. To cure a junkie economy, later on, will be painful.
What to expect, from a business perspective? Chinese firms may become more aggressive in the short term and Chinese demand may experience a sudden reprise, but it will be financed with debt. Therefore, both consumptions and productions will not be sustainable in the long-run and their effects on foreign competitors or suppliers can only be temporary.
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