Concern increases over local stimulus

Private investment must have dominant position, expert says

Major stimulus plans, announced by local governments, have sparked worries over rising debt and poor returns on investment.

Zhang Changchun, director of the Institute of Investment at the National Development and Reform Commission, said that "social capital", instead of government spending, should play a dominant role in any stimulus.

Private investment, in particular, should be encouraged, he said.

His remarks came after a number of cities and provinces unveiled stimulus programs, ranging from investment projects to purchases of subsidized housing.

With growth in the world's second-largest economy hitting 7.6 percent in the second quarter, the lowest in three years, the market is eagerly expecting a new round of stimulus.

Changsha, capital of Central China's Hunan province, took the lead late last month by announcing an 829 billion yuan ($130 billion) stimulus program. The money will go to 195 projects, including airport, subway and urban infrastructure facilities, the local government said.

The provincial government of Anhui, East China, also announced 81 major projects with a planned investment of up to 45.7 billion yuan.

These programs, and others, have been dubbed the "local stimulus'', a reference to the 4 trillion yuan stimulus that was rolled out by the central government in 2008 to ward off the impact of the global crisis.

But questions are being asked about the financial sources to pay for the stimulus with a property market slowdown and curbs on financing vehicles, a form for local governments to raise cash.

"This year's fiscal budget has been set", indicating that any fiscal stimulus in 2012 will be limited, Zhang said.

The government has cut its budget deficit by 150 billion yuan to 550 billion yuan in 2012.

Policy: Lending will 'give boost'

Local governments are legally banned from directly issuing bonds. But the central government can issue bonds on behalf of local governments this year.

These bonds will be around 150 billion yuan, 50 million yuan more than last year.

Local government debt was 10.7 trillion yuan at the end of 2010, according to official auditors. Only 300 million yuan of local government debt was added in 2011 as banks tightened lending to financing vehicles.

Xiao Jincheng, director of Land Development and the Regional Economy Research Institute under the NDRC, said local officials should not overreact to slowing growth.

"The economic slowdown was due, in part, to the tightened monetary policy adopted earlier to ease inflation and the real estate bubble," Xiao said.

But the central bank has eased monetary policy and asked commercial banks to relax lending, so the economy could pick up quickly, Xiao said.

Programs announced by Changsha will help develop central and western areas but such plans are not necessarily suitable for eastern areas.

But Ma Guangyuan, a researcher at the Chinese Academy of Social Sciences, said that local stimulus plans pose a bigger risk to the economy than any economic slowdown as they could increase bank debt levels and burden future generations.

Some cities are already saddled with relatively high debt levels after the 2008 stimulus.

Zhang said money used to finance local stimulus should come mainly from State-owned enterprises, as well as private and foreign companies.

Investment should be "pragmatic, efficient, and market-oriented", he said.

To bolster growth, interest rates were cut in June and July and the government unveiled policies to encourage private investment in the energy, health and defense sectors.

The moves will help private companies gain larger market access in areas that have long been dominated by State-owned enterprises.