Nearly two years ago I had warned on this blog of the deep risks linked to China’s (then-widely-praised) fiscal stimulus and financial easing measures, which while displaying early signs of efficacy also reinforced the structural imbalances at the source of China’s economic vulnerabilities and environmental ills (see my earlier blog post here). I pointed out that much of the RMB 1 trillion (GBP 100 billion) stimulus spend and an even larger amount in bank lending was being funneled into energy-intensive manufacturing and export-oriented sectors already plagued by overcapacity, even as global demand was dropping off (hence dimming prospects for Chinese exports).
In a follow up post later that year (see the post here) I again highlighted concerns about the sustainability of the stimulus and pointed to the environmentally detrimental consequences of the fiscal and credit ‘binge’, noting that the recovery was unlikely to be nearly as ‘green’ as many pundits at the time – including analysts at HSBC – had made it to be (NB: HSBC were so gung-ho as to speak of a ‘New Green Deal’ in China. See their report here), and notwithstanding China’s pledge to join other G20 leaders in using fiscal stimulus programs to build a “resilient, sustainable, and green recovery.” I lamented that the government had missed the opportunity of a massive counter-cyclical boost to steer the economy on to a more equitable and sustainable growth path powered by domestic demand.
Now finally, Premier Wen has come clean on the fragility of the recovery. During a recent online chat with netizens ahead of the meeting of China’s congress, Wen explained that the government would reduce its growth target down a percentage point to 7% (GDP growth was 10.3% last year) in order to check inflationary pressures and mitigate the environmental and socially adverse consequences of runaway growth fueled by the stimulus. In the interview, he counseled that:
“We must not any longer sacrifice the environment for the sake of rapid growth and reckless roll-outs, as that would result in unsustainable growth featuring industrial overcapacity and intensive resource consumption”
He further noted that China must become more self-sustainable by increasing domestic consumption and reducing its reliance on exports and investment. He cautioned that:
[continuing on the current path] will lead to production capacity gluts and deepening pressure on the environment and resources so that economic development will be unsustainable.
Mr. Wen’s online interview was held against the backdrop of widespread public dissatisfaction with soaring inflation and a call for Chinese “Jasmine rallies” – a reference to the Jasmine revolution in Tunisia which set of a domino of unrest through the Middle East.
