Yuan Watch : Relevant measures needed

(The relevant measures, in my opinion, will be an appreciating yuan that offers a 'guaranteed' fixed-income for FDI. China cannot afford the stimulus package headline number. Purchasing power parity suggest the yuan is anywhere from 20-60% undervalued. -AM)

Editor: Zoe Zhang
26 Nov 2008 09:30:39 GMT


The recent 4 trillion yuan ($586 billion) investment package by the State Council for the next two years has spurred a fever in infrastructure constructions around China, with sources saying the fixed assets investment plans for local governments have expanded from 6 trillion to 18 trillion yuan in a week. However, local finances in fact could not bear such huge expenses, according to a report from today's Shanghai Securities News.
In a press conference held by the State Council Information Office, Wang Jun, Vice Minister of Finance, said central financial deficits will inevitably increase when China adopts positive financial policies, but he emphasized the deficits would be under control.
Wei Fengchun, a senior analyst at the South China Securities, said the controllable proportion between financial deficit and GDP should be less than three percent.According to 2007 GDP figures and a desirable annual growth rate of 8 percent, the controllable deficits predicted in China over the next three years will be 799 billion yuan, 862.9 billion yuan, and 932 billion yuan respectively, or 2.59 trillion yuan in
total. Government investment will bring more social funds, and figures show the multiplier effect for infrastructure investments between 1998 and 2002 was 3.2. Therefore local financial power will reach 8 trillion yuan in three years if the multiplier effect is kept stable.
The multiplier effect means the expansion of a country's money supply results from banks being able to lend.
"In fact, the multiplier effect from government investments will be lower than that of ten years ago," said a report from China International Capital Corporation Ltd.
Compared with that of ten years ago, the return on investment in infrastructure construction has seen negative growth, and the housing market has been in an adjustment period, said the report.
Hence, together with 2.59 trillion yuan in government deficits and 8 trillion yuan in local finances, the desired
total may reach 10 trillion yuan. That makes it significantly lower than the 18 trillion yuan that is supposed to be raised by local governments.
According to local investment plans, the 18 trillion yuan is mainly from central government, local governments, business circles and banks.
However, experts familiar with the matter said governments have more passion for the plans than business ciricles and banks.
In addition, local finance bears more invisible pressure, which is easily forgotten by the market, said Wei from the South China Securities.
Currently, local governments' financial income is mainly from land bidding and its derivatives soaring, and cities would like to push up housing prices. But this year, many cities saw a decline in housing prices, with many failed bids on land.
The National Development and Reform Commission, the top planner, said on November 11 that property prices in China's 70 large and medium-sized cities rose 1.6 percent year-on-year in October, the lowest growth rate since 2006.
The average price of Beijing's high-end residential apartments fell 5.5 percent quarter-on-quarter from July to September, the first time since the first quarter of 2006.
"Past fast increasing financial income will never show up,"said Wei, adding the risks brought on by high financial pressure will be hard to control if there are no relevant measures taken.