By IPS Correspondents
BEIJING, Nov 26 2008 (IPS)

World politicians and economists have cheered the stimulus package unveiled by Beijing this month, touting it as the biggest economic recovery plan of peace time – but there are misgivings.

As more details emerge about the allocation of money and spending plans, doubts are mounting as to whether the package is capable of “rescuing the world” from economic crisis and even whether it would succeed in preventing the domestic economy from slowing down sharply.

“The world is too big to be saved by China,” says Liu Jin, financial expert and professor at the Cheung Kong Graduate School of Business in Beijing. “This package is not designed to solve imbalances in global economic order; it is more of a political statement that China is ready to deal with the crisis. China is poor and has a lot of structural problems that needed tackling even before the crisis”. Global growth forecasts have all dropped and China is among the most vulnerable to this. The World Bank’s latest China Quarterly Update predicts growth in 2009 will slow to 7.5 percent – dipping below the accepted safety line of 8 percent economic growth necessary for China to generate enough jobs and keep social unrest at bay.

Writing in a flagship magazine of the communist party, premier Wen Jiabao seemed seriously worried: “We must be crystal clear that without a certain pace of economic growth, there will be difficulties with employment, fiscal revenues and social development”.

The latest report by the United States government’s National Intelligence Council on the shape of the world in the next 20 years also sounded an alarm. As well as being the new centre of power and predicted to become the world’s second-largest economy, China is portrayed as a potential troublespot.

“For the better part of two decades, the world has been focused on the extraordinary growth within China, and now it looks increasingly likely that it will slow,” Jacqueline Newmayer, of Long Term Strategy Group and a contributor to the repot says. “That could create significant instability in the country and surrounding regions, with people questioning the legitimacy of the communist government”.

The proposed stimulus package, which is to be spent from now until 2010 includes a mix of investment and consumption-boosting elements tapping ten areas such as the construction of roads, railways and other infrastructure, budget housing and re-construction of the areas devastated by May earthquake.

While spending on health, education and poverty relief are mentioned in the plan, the emphasis there is on construction too, for example of local health clinics or the renovation of schools. Only one of the stimulus policies is directly linked to social spending, capturing social security, pensions and income support.

With so little of the money going into spurring household spending, economists have questioned the plan’s chances of releasing the potential of China’s huge savings. China’s savings rate in 2007 reached 51.2 percent of GDP, a phenomenal rise from the 37.7 percent rate in 2000.

“The new plan is actually a classical Keynesian formula,” says Xia Yeliang, researcher at Foreign Economic Studies Centre of Beijing University. “We have tried it in 1998 (after the Asian financial crisis) and we know it works. The difference though is that China at the time needed the entire infrastructure that was built. This time around we must focus on infrastructure and more. The quality of spending is very important and we must make sure it benefits ordinary people most of all.”

Officials have revealed that only 25 percent of the announced 586 billion dollars bill will come from the central budget with the rest of the funds supplied by the state-owned companies, local governments and the state banks.

After a relatively prolonged period of austere fiscal and monetary policy, the relaxation of controls on investment now is being described by the media here as a “scramble” and “stampede” by companies and officials to get a piece of the “state pie”. The economic boom has filled the coffers of many localities with tax revenues and officials have been lobbying for a change of policies to allow them the freedom to invest.

“We need to learn from our historical mistakes,” cautioned the China Times. “Without proper supervision at local level, the investment of so much money over a short period of time could leave the country littered with ‘beauty show’ and ‘face projects’ of little value to anyone but officials themselves”.

The paper has conducted a poll, which claimed that 60 percent of its respondents doubted as to whether the stimulus money would be invested in the areas designated by Beijing for development.

Many economic observers say investing in a stronger social safety net and reduction of income inequality and not infrastructure building should be the priorities at this time. They say a disproportionate focus on boosting investment risks aggravating imbalances in the economy.

“There is no doubt that an increase in the investment in health and education would contribute to boosting domestic demand,” says Michael Pettis, professor of finance at Guanghua School of Management at Beijing University. “If the New Deal leads to aggravation of income inequality, then it doesn’t solve any of China’s problems”.

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