Rolling out a bigger stimulus package is like quenching a thirst by drinking poison and will bring about even worse consequences than the previous package, Shi said, using a Chinese idiom.
Chinese economist Larry Lang echoes this opinion on his blog saying: “[The economy] will sink into even deeper crisis after a brief moment of excitement.”
The downturn has lowered local governments’ revenues as land sale revenue decreased. For example, Changsha City, which will invest $130 billion in 195 projects, recorded $10.8 billion in revenue in 2011; and Guizhou Province, which intends to invest $471 billion in different projects, only reported revenues of $20 billion in 2011, according to International Finance News.
Where will the stimulus money come from then? Shi said local governments obtain funding either through borrowing from banks via a local government financing vehicle or issuing local government bonds. He predicted that the Central Bank will soon reduce bank reserve requirements again to loosen up monetary policy.
People Pay Price
Shi said that local governments are so heavily indebted that they won’t be able to pay their debts; so in the end the Central Bank will have to print more money. This will result in currency depreciation, and eventually the people will have to pay via inflation.
Mon-Chi Lio, associate professor of political economy at Taiwan’s National Sun Yat-sen University, told the Sound of Hope Radio Network that the regime has resorted to using wasteful investments to maintain stable growth before the transfer of power in the upcoming 18th Party Congress. Soon many projects, especially those that have not been properly evaluated or reviewed, will compete for funding from banks, at the cost of the people’s money.
Read the original Chinese article.
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