China initiated a 4 trillion yuan ($634 billion) stimulus package in 2008 to offset adverse global economic conditions by boosting domestic demand. The main plank of the package was to loosen credit conditions to enable local governments to embark on massive infrastructure spending programs to buffer the impact of global economic downturn on the Chinese economy. According to the plan of the central government, the central government only financed 30 percent (i.e. 1.2 trillion yuan) of the stimulus program and local governments would finance the remaining balance (i.e. 2.8 trillion yuan).
Facing the investment targets delegated from the central government, local governments were active in setting up more local government financial platforms LGFPs to enlarge the fund pool for local projects.
The stimulus package had accomplished impressive results, making China a quick rebound from 4.3 percent growth in the fourth quarter of 2008 to 9.5 and 11.4 percent in the first and second quarters of
2009. However, it is argued in this paper that the impressive results are achieved at the expense of a number of unintended repercussions on the Chinese economy. These repercussions include enhancing risks embedded in the banking sector, crowding out lending to the private sector, and building up of excess capacity. All these undermine China’s effort to establish a commercial banking system in the past two decades and hinders China’s transformation to a growth model aiming at quality growth. It is further argued that though the central leaders have been fully aware of the embedded risks and inefficiency of these policy loans, policy targets are still put ahead of efficiency consideration. In face of the uncertain global economic outlook, central leaders will focus more on ensuring economic growth and stabilizing employment. It is expected that China will continue to rely on the key role of policy loans in leveraging economic growth.
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Charles Kwong, Associate Professor of Economics, School of Arts and Social Sciences, The Open
University of Hong Kong, 30 Good Shepherd Street, Ho Man Tin, Kowloon, Hong Kong SAR, Tel 852-
27685719, Fax 852-23913184