"After China's RMB 4 Trillion Stimulus, Now What?"

From Knowledge@Wharton (China):

Eight percent: That is the level of 2009 GDP growth that China's government wanted, and that's what it got. The government was one of the first in the world to announce a stimulus package to spend itself out of the global financial crisis. And Beijing’s RMB 4 trillion ($585 billion) stimulus arrived with a bold and specific goal: To achieve 8% GDP growth in 2009. With actual GDP growth in 2009 estimated to be between 8.3% and 8.5%, it appears that Beijing has delivered the results. Or has it?

The government does deserve credit for stabilizing the economy. Along with the rest of the world, China suffered a sharp slowdown in the second half of 2008, and many companies in the country experienced a dramatic plunge in business that had not been seen since the country first opened up its economy 30 years ago. Confidence plummeted and companies slashed headcount, including experienced white-collar workers – whereas many of these same companies just a year earlier were complaining about staff shortages and rapidly rising wages.

Within a few months of the stimulus package's launch, China’s economy began to recover. While GDP growth slowed to 6.1% in the first quarter of 2009, it rebounded in the second quarter to 7.9%. Many companies reported improving sales, while others saw new investment opportunities emerge. Exports continued to lag, but foreign direct investment was strong and domestic consumption rose at a surprising pace.

However, while the government stimulus is maintaining confidence in China’s economy and promoting its recovery, some contend that it conceals serious challenges and exacerbates pre-existing problems.

China watchers are now questioning the medium- and long-term benefits of the stimulus package. Some say it is aimed at the wrong sectors, emphasizing infrastructure projects that have created few jobs and state-owned enterprises that led to industrial overcapacity and starved the private sector of much-needed capital. Others point out that the package does little to generate export growth. There's also concern that the sharp surge in bank lending that accompanied the program may be inflating asset bubbles, and some of the new loans will be difficult to repay. And in a broader sense, questions abound whether reinforcing the state-led economic model may create more hurdles for China as it moves toward a more market-oriented economy.

Wanted: More Jobs

The belief that China needs to achieve 8% GDP growth to maintain social stability is largely associated with new job creation, and statistics show that for every 1% growth in GDP, one million new jobs are created. Therefore, GDP growth of 8% would create at least eight million new jobs, potentially absorbing much of the 10 million new job seekers entering the market each year.

But 2009 was different. Unlike in the past, the investment-fueled growth last year achieved the 8% GDP growth target but did not create as many new jobs as expected. The reason? Much of the stimulus was injected into infrastructure projects, which require fewer employees than traditional export-oriented businesses, says Xu Mingqi, deputy director of the Institute of World Economy at the Shanghai Academy of Social Science.

“The dramatic decline in exports, on the other hand, squeezed labor-intensive export industries, resulting in millions of migrant workers losing their jobs," he adds. White-collar employment has also not recovered to previous levels. The official registered employment rate at the end of 2009 was 4.3%, but that does not include unregistered migrant workers or job-seeking university graduates.

As for those university graduates, a recent government-sponsored jobs program highlighted the grim prospects they face. In 2009, for the first time, China’s army targeted universities to recruit about 130,000 college graduates....MORE