China’s Fiscal Stimulus and Local Government Debt

Published on Author Duncan

After reading the World Bank policy research paper and an article in Aljazeera, it seems that China’s investment in infrastructure projects was very helpful for steering through the global recession, but the question as to whether or not these projects will have a good long term ROI still looms.

Additionally, with the combination of a high level of debt for local governments and low increases in tax revenues, if there is a full blown Euro-crisis, would China be able to launch another stimulus package without fears of a liquidity crisis?

One Response to China’s Fiscal Stimulus and Local Government Debt

  1. 1. If (or rather when, because the value of “the” multiplier depends on the macroeconomic context) the value of the multiplier is greater than 1, then it’s an effective policy no matter the ROI.

    2. How to finance it is less important, but as you note local governments have weak fiscal capacity. So central government finance should be the method used – if consumers and companies are saving too much, then the central government can soak up their savings and not face a fiscal crisis down the road.

    3. I don’t see any connection between domestic Chinese bond issues or bank borrowing (here by local governments) and the Euro crisis. China is not selling bonds in the London or Frankfurt market, particularly given that China is a net exporter and holds voluminous foreign assets. So Chinese fiscal policy is financed by domestic debt.

    4. China is now a huge market. But many small (in the financial sense) developing countries (which China was until the 1990s) pegged their exchange rates to prevent such volatility. It’s hard to make that work, and then it’s hard to undo it and move to floating rates. The gradual, guided appreciation of the RMB is a necessary step to enable later “floating” and more open capital markets.