Who is getting the money?

More details have emerged about the 4 trillion stimulus package that China has rolled out.  The main questions remain: who will get the money?  How will it be spent?  In a revealing article published the 21st Century Economic Herald (my favorite), reporter Wu Hongying gives a detailed account of how Chongqing (a provincial unit controlled by princeling Bo Xilai) plans to spend the money. I believe the situation faced by Chongqing is similar to that in many Chinese cities and provinces.  Basically, Chongqing SOEs, which focus on land holding, real estate, electricity, and financial services, are in deep trouble.  Land prices in Chongqing have fallen by over 70%.  The electricity group is in the red by about 250 million RMB.  The debt asset ratio for the 8 major SOE groups in Chongqing has risen to 72%.  No details are given about the financial holding companies, but considering that their main role is to inject capital in the other SOEs, they can’t be doing too well either.  Things are not pretty, and the well off SOEs have to inject capital in the problematic ones.

So,  the central government rolls out a 4 trillion stimulus package.  As I pointed out in the last note, only a part of the money will be from the central government, but at this point, local governments are desperate to get this part.  Thus, a massive fraud whose working and purpose are perfectly clear to all the players involved is perpetrated.  Basically, local governments propose projects which may or may not be implemented with the sole purpose of receiving central funding and “supplementary” (peitao) bank loans from the state banks in order to stave off the bankruptcy of local SOE groups, which are heavily indebted at this point.  The local “self raised” part of the capital can be a piece of idle land or a redundant factory.  The excuses are many, but both the local and the central governments know that the center and the banking system must give a large chunk of money in order to prevent (delay?) massive bankruptcies of local and a few central SOEs. As for Chongqing, it has applied for 20 billion in investment before the end of 2008 (out of the 100 billion announced by the NDRC for China as a whole).  Almost all of the money will go toward large SOEs in Chongqing.  Due to Bo’s political connections, Chongqing will probably get at least 5-10 billion, thus staying solvent for some time.

Similar to the US bailout, this Chinese bailout prevents (delays?) the mass bankruptcy of provincial and municipal state owned enterprises.  If these entities go bankrupt, the unemployment impact would actually be moderate since the state sector only employs around 30% of the urban work force now.  Bankruptcies would also cause a huge problem for state owned banks which have lent heavily to these SOEs (especially China Development Bank).  However, China has plenty of resources with which to recapitalize banks.  The real reason for resuing local SOEs is political–their bankruptcy would cause an upheaval (perhaps THE political upheaval).  Without these entities, local officials would be completely reliant on central money and would have many fewer rent-seeking opportunities.  Given the low salaries of Chinese officials (13,000 bucks for provincial governor?), they would have much weaker incentive to be loyal to the regime.  Even if the 4 trillion brings little stimulative effect, rent must be preserved for provincial officials for this reason.  Of course, like the US bailout, the Chinese bailout only buys time.  Given that many state owned groups bet heavily on the real estate market recently, I suspect that more bailouts will be needed in the near future.   In the near future at least, the Chinese budget can handle these costly, but necessary bailouts.