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Hunan capital calls for huge stimulus package

Changsha China

The global financial crisis has caused declines in growth across almost every continent. After decades of steady gains, Chinese officials are now anxiously seeking short-term solutions to a temporary financial lull. In a knee-jerk reaction, government officials in Changsha are calling for an enormous amount of government stimulus to be pumped in the economy. Reuters reports on the situation and the imminent spending anticipated to occur:

The government of Changsha, the capital of central China’s Hunan province, has launched an 829 billion yuan ($130 billion) investment stimulus program to bolster the local economy, state media has reported.

The money would be spent on 195 projects, including airport, subway and urban infrastructure facilities, as well as developing energy efficient industries, said a report by the official China News Service on Wednesday.

Zhang Zhiwei, chief China economist at Nomura in Hong Kong, calculates that the headline number on the stimulus plan is worth 147 percent of Changsha’s nominal GDP in 2011, or 1.8 percent of China’s national economic output.

Even if spread over five years, Zhang says the implied investment would be equivalent to 46 percent of total annual fixed asset investment in Changsha.

Skeptics say a program on that scale is implausible and could not be properly financed with China’s banks still nursing bad loans worth an estimated 2-3 trillion yuan after local governments racked up debts of 10.7 trillion yuan in the wake of Beijing’s nationwide stimulus program unveiled in 2008.

“Indeed financing is a problem, we expect projects to be financed by banks, local government and the central government collectively, but banks will likely be the main source,” Zhang said in a note to clients.

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