CHINA: Despite running the world's most dynamic economy, China's Finance Minister Mr Xiang Huaicheng revealed troubling doubts yesterday about the wisdom of an economic policy based on running deeper and deeper into debt, writes Jasper Becker, in Beijing.
Amid public warnings by leading Chinese economists that China is creating a dangerous debt cycle, Mr Xiang said that for the first time in five years, there would be "zero growth" in government spending.
Mr Xiang unveiled a budget in which planned treasury bond issues of 140 billion yuan (€15.3 billion) barely cover the interest payments on old bonds that total 94 billion yuan (€10.3 billion) this year.
Since the 1997 Asian financial crisis shook China, the country has relied on massive public works spending programmes to keep the economy growing and create the needed eight million new jobs a year. China issued €72.8 billion worth of special infrastructure construction treasury bonds in the last five years.
Annual growth rates of around 8 per cent attracted envy from around the world, but now China says it is worried over whether this is sustainable, and not just because of the global slump.
"Effective demand is insufficient, the supply structure is irrational and the internal mechanism for driving economic growth is unsound," the Finance Minister said, before gloomily predicting that even China's blistering export growth must stall.
Under outgoing premier Mr Zhu Rongji, China did everything possible to bolster consumer spending, including three rounds of hefty salary hikes for state employees, long public holidays and a tax on bank savings.
Now a new policy is being signalled. Beijing is cutting T-bonds issues by 8 per cent and postponing wage hikes planned for 2002 until the middle of this year.
Instead, some extra money will go to bankrupt enterprises, urban poor and re-employment measures, plus a 9 per cent boost in the defence budget. However, even this is a striking change from the double-digit increases in defence spending announced every year since 1989.
Although Mr Xiang said that he expected government revenues to grow by 5 per cent this year, the total deficit will increase to €36.5 billion and if all debt repayments are made then the budget hole rises to €72.8 billion.
Although this does not appear dangerously large for a €1 trillion economy, China has massive hidden liabilities, including pension obligations and bad banking debts that run as high as €1.4 billion. The real worry of the financial crisis is that government tax revenues in China only amount to 18.5 per cent of GDP, compared to around 40 per cent in most European countries.
And, of this, only a third is actually collected and spent by the central government. So if China does not quickly move onto structural reforms, Beijing may have to start tapping the foreign debt market to meet all its needs.