Subsidy-stimulus back on the platter

When in doubt, order strong-arm tactics, stimulus shots and subsidies. Just when China appeared to be maturing enough to leave the economy to market forces, it fell back on its favourite ‘resuscitation formula’ to quell the panic triggered by a slowdown.

In what can be called an instance of ‘short-termism’, brought about by political compulsions, the securities regulator asked state-owned enterprises (SOE) to buy back their own shares to restore confidence in the stock market. The China Securities Regulatory Commission reportedly approached more than ten major SOEs, including Baoshan Iron and Steel, Sinopec, PetroChina and Shenhua Energy, asking them to buy back their own shares. News of the potential buybacks rallied the market, with the Shanghai Composite jumping 3.7 percent at last week’s Friday closing.

Some of the public companies have already launched buybacks. Late last month, share prices of Baoshan surged 10 percent after it announced a buyback plan worth RMB 5 billion to mop up 1 billion of its shares. Until then, its share price had dropped 16 percent since January. High-speed train maker CSR Corp also announced a buyback of 471,000 shares.

There is a sense of political urgency in stabilizing the securities and futures market and boost investor confidence. The 18th National Congress of the Communist Party of China will be held later this year, when China will see a change in its top leadership. From the Chinese perspective, such momentous events cannot be seen to be taking place amid troubled, depressed times.

Stimulus drip-line

Thus, the inevitable fallback on a stimulus-subsidy combo. The biggest single-day rally in almost eight months came last Friday - only after the government unveiled stimulus plans worth more that RMB 1 trillion to lift industry sentiments, if not the actual economy. The National Development and Reform Commission announced 55 investment projects to build new highways, ports, railways, sewage networks and wastewater treatment across the country, in the hope that it will send companies back to their planning boards.

The country has been drip-feeding stimulus measures into the economy over the past few months and so far had maintained restraint on announcing any kind of ‘blitzkrieg’. But a near desperation to counteract the impact of slowing exports to Europe, falling profits of Chinese companies and a gloom perception with China globally, forced it to take emergency measures.

Unlike in 2008, when the central government led stimulus efforts, the burden of seeing through the stimulus-related growth plans now falls on local governments. The decision seems startling considering the mountain of debt accumulated by provincial governments over the last four years. These governments are further burdened by shrinking fiscal revenue as they can no longer bank on land sales in a depressed property market.

Subsidy stays

A section of analysts argue that expanding infrastructure spending is any day better for spurring growth than merely trying to boost consumption. This, however, does not prevent subsidy from being a favourite Chinese tactic to pump up demand. In its most recent offering this week, Beijing has decided to subsidize the use of energy-saving desktop computers and air-conditioners to push both the energy-saving and consumption agenda. It will earmark RMB 14 billion in subsidies to encourage the purchases of six types of energy-saving products, including desktop computers, air-conditioners, fans, water pumps, compressors and transformers.

The subsidy program will last for one year and is expected to raise the market share of energy-saving products to more than 40 percent. China started subsidizing a range of ‘green goods’, including light bulbs and automobiles in 2009. From June 1, this year, it announced a fresh batch of subsidies for purchases of five types of energy-saving home appliances, including air conditioners, flat-panel televisions, refrigerators, washing machines and water heaters, for rural consumers. The subsidy policy is largely perceived to have yielded remarkable results. Under the program, farmers can receive subsidies equal to 13 percent of the price of the home appliances they buy. It’s a different matter that there are growing concerns of skewed consumption patterns in China’s rural pockets, totally at odds with the quality of life prevalent in poor regions. But as of now, much hinges on the stimulus-subsidy culture to create the perfect backdrop for the country’s political transfer of owe.

The writer is a freelance journalist based in China.