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Changsha plan at heart of China stimulus

Date: 2012-08-06

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The front line in the battle to transform Changsha, a city in central China, is a muddy lakeshore where building workers brave searing heat to dig foundations and pour concrete.

On the city’s outskirts, Meixi Lake is today surrounded by green hills and red earth, but by the end of October will boast the beginning of a futuristic arts centre and dozens of high rise tower blocks.

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It is a focal point of what Changhsa’s government has termed the “100 day battle”, a campaign that it launched last month with the long-term goal of building up the city and the more pressing objective of fuelling growth as the economy slows.

“We were working on a property development that was halted because the company ran out of funds. Then we heard about Meixi Lake and came over. There is lots of work to be done here,” said Mr Xu, a wiry man aged 50 from the nearby city of Miluo who was mixing cement with a shovel.

Officials have not formally called it an economic stimulus, but their rush to ramp up investment is being seen by analysts as an archetype of China’s response to its stuttering economy. Instead of the mammoth stimulus programme led by the central government when the global financial crisis erupted in 2008, local governments are this time taking charge, trying to accelerate spending and rally banks and investors to hop on the bandwagon.

That the government of Changsha, a city of 7m, needs to prop up its economy at all might strike outside observers as bizarre. The city’s gross domestic product increased 12.9 per cent in the first half of this year, about two-thirds faster than the national growth rate. But the pace of growth was down from its 15.2 per cent average of the past five years. The drop to low double-digit growth has been sudden and unwelcome.

“Changsha has been among the fastest growing of the cities in central China, but it’s still small on a per capita basis and we want to catch up with the coastal areas. It’s like when you give a skinny man a nice meal. He still wants to eat more,” says Liu Fei, president of Hunan Fuli Investment Consultancy.

If Changsha gets its way, the 100 day battle will just be a start. The city made headlines late last month when it unveiled plans for Rmb829bn ($130bn) in spending on projects ranging from airport expansion to road building, waste treatment and sprucing up the city.

The investment target was jaw-dropping, nearly 150 per cent the size of the city’s GDP last year. By contrast, China’s official stimulus in 2009 was about 5 per cent of GDP.

Lu Ting, an analyst with Bank of America-Merrill Lynch, said the Changsha announcement signalled the government’s intent to rev up the economy but the numbers should be taken with a pinch of salt. “There is a tradition for local governments to announce plans which might be too ambitious to believe,” he said.

The tradition stems in large part from politics. Local officials are evaluated on economic performance and they view large-scale investment as the surest path to growth. Moreover, to finance their plans, they have to compete for funds from the central government and state-run banks and so tend to overstate their goals.

The struggle for funding has become tougher this year, leading Wang Tao, an analyst with UBS to describe local stimulus plans such as Changsha’s as “wishful thinking”. A downturn in the property market has eroded revenue from land sales, a major cash source for local governments. And Chinese banks, worried about bad loans, have been reluctant to open the credit taps as they did at the height of the global financial crisis in 2009.

But funding channels are slowly opening up again. Beijing had made it hard for local governments to borrow because of concerns over their debt loads, but in recent months it has given permission to those judged to have solid finances and good growth prospects to tap banks and the bond market again. Changsha appears to be one of the favoured cities, with several municipal institutions issuing bonds since April.

In announcing Changsha’s investment plans, Chen Run’er, the city’s Communist party chief, said the government was trying to get local finances flowing again.

“We will build a platform to solve the problem of banks not having good projects to which to lend and local enterprises not being able to obtain funding,” he was cited as saying by the Chinese News Agency.

The development of Meixi Lake has been identified as one of the core projects in Changsha’s $130bn plan. Even if there are questions about how much the city will really spend in the end, the bulldozers plying the dirt road around the lake leave little doubt that it has already set its investment wheels in motion. (By Simon Rabinovitch in Changsha)