China prepares vast stimulus as slump threatens Asia

By Ambrose Evans-Pritchard

The bellwether economies of Taiwan and Singapore both contracted in the second quarter. Korea’s industrial output fell in June, while Japan’s manufacturing PMI index fell in July to the lowest since the Fukushima disaster, with the export gauge crashing to recession levels.

“Factory output, new orders and exports all decreased at the fastest rates since April 2011. These are worrying developments given the weakness of global demand,” said Markit’s Alex Hamilton.

While China has ostensibly held up much better, electricity use has been falling in recent months. “Unless the Chinese steel and aluminium industries have discovered how to make do without electricity, it would appear that their growth has virtually ground to a halt,” said Berkeley professor Barry Eichengreen.

China’s president, Hu Jintao, has told officials to brace for economic shocks from abroad, calling for “fiscal and monetary support and efforts to expand domestic demand”.

The city of Changsha has seized the moment, unveiling plans to spend $130bn (£82bn) on roads, satellite towns, and an industrial park – almost 150pc of its GDP.

Guizhou trumped this today, touting an eye-watering investment package of $470bn on transport, energy, infrastructure and eco-tourism over 10 years. It is a staggering sum for a sleepy province with just 35m people.

Nomura said the regions are in a prestige race against each other to claim the highest growth rate, with regulators eagerly switching on the credit spigot once again. The Chinese railways have chipped in with plans to crank up spending by 40pc in the second half of the year.

It is unclear how such projects can be financed. Fitch Ratings said China has already reached the point of diminishing returns from debt-fuelled growth. The economic return on each extra yuan of credit has collapsed from 0.75pc to under 0.4pc over the last five years.

Prof Eichengreen said China’s authorities have abandoned efforts to wean the country off mega-projects, with tell-tale “ghost towns” and “bullet trains running off rails”. “The restructuring agenda is now on hold,” he said.

Full-throttle stimulus may keep uber-growth alive for a while but only at the cost of an ever-more deformed economy, ever more reliant on exports. China’s leaders know the risks. The last credit spree in 2008-10 pushed investment to 49pc of GDP – unprecedented in world history – and is now deemed a policy error by Beijing.

Premier Wen Jiabao has warned that the economy is “unstable, unbalanced, uncoordinated and unsustainable”, but reformers face a tug-of-war with regional party bosses who rely on perma-boom to keep the lid on social protests.

The Politburo has clearly decided to protect jobs whatever the other risks, steering the yuan down 1.3pc against the dollar this year to protect the wafer-thin margins of exporters.

Nomura said Beijing is preparing a 17pc VAT rebate on exports by Chinese steelmakers to divert excess output abroad, exporting China’s “over-capacity crisis” to the rest of the world.

Albert Edwards, for Societe Generale, said this echoes the Asian crisis in the late 1990s when the region flooded the West with goods, transmitting a deflationary impulse through the global system. This time the Asian bloc is a bigger animal, and the West is more fragile.

“The harder the landing in China, the more goods they are going to dump on us. It is political dynamite in the run-up to a US election,” he said. The US has already imposed anti-dumping penalties on Chinese solar companies accused of selling below cost price.

China’s policy shift is bitter-sweet for the West. While new stimulus will help lift the whole world, the mercantilist measures slipped into the mix will add to global woes. Analysts are watching very closely to see which of the two is bigger.