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Chinese Budget Deficits Spark Increasing Concern - 2003-03-08

The Chinese government's public spending is exploding, and there is increasing concern about its record budget deficits and debt-burdened state banks. The government is bringing in less than it is spending to create new jobs, stimulate growth, and ensure social stability.

Chinese authorities are keeping the country busy with thousands of ambitious public-works projects. Diverting water from the Yangtze River to the parched Yellow River in northern China will cost the state an estimated $59 billion. The addition of 7,000 kilometers of new railway lines has a budget of $42 billion. And the modernization work in Beijing to prepare for the 2008 Olympic games is estimated at $34 billion.

Such infrastructure projects, along with thousands of others, are driving economic growth in China. But the cost of the projects is outpacing the government's ability to collect revenue, leading to record budget deficits and a huge burden on taxpayers.

Foreign experts fear that the short-term benefits of public-sector deficit spending, which include generating new jobs, could be outweighed by the long-term costs.

Some estimates say there are up to 270 million unemployed or under-employed people in China, due in part to the dismantling of state-owned enterprises and agricultural reforms.

Despite the official figure of eight-percent economic growth last year, unemployment is seen as a serious threat to social stability in China.

Andy Xie is managing director of the investment bank Morgan Stanley in Hong Kong. "China has a high-level of unemployment rate. Universities are graduating more people than ever, so China needs to keep the economy growing very rapidly. That is why the government budget deficit is unlikely to be reduced in the foreseeable future," he says.

The World Bank warned late last year that China faced a challenge in keeping its budget deficit below the internationally accepted danger level of three-percent of gross domestic product. Government economists estimate that last year's deficit almost certainly exceeded that level.

There is also the question of how much infrastructure spending the country can afford when it will soon need to bail out insolvent state-owned banks.

Chinese semi-official media reported earlier this year that the government was considering injecting $40 billion into the big-four state banks. Analysts estimate the cost of a bailout at hundreds of billions of dollars.

The combined pressures of growing public spending and debt at state banks could lead to a financial meltdown.

Though public spending on infrastructure may reduce unemployment and produce essential infrastructure, part of China's economic problem is the massive personal savings of China's populace. Mr. Xie says, if people would spend their savings, that would help power the economy. "The government is investing this money, but it is unlikely that the Chinese people are going to reduce their savings. So, unless the government spends the money, the Chinese economy is going to suffer," he says.

Mr. Xie says China's spending decisions are in part driven by an effort to redistribute growth to the poorer provinces. This is leading to public projects of questionable value. "Because the money allocation is done by political necessity, at some point, you have to pay for this, that is what we saw in South Korea in 1998," he says. "One thing to keep in mind is that a financial crisis is not the end of the world. It is just a process to settle the bills for investments that were made unproductively, but economic growth continues."

Finance Minister Xiang Huaicheng was quoted late last year as saying that "spending on general purposes must be strictly controlled to help limit the size of the budget deficit."

How the government plans to control its spending while stimulating growth may become clearer next week, when financial officials give their past and future assessments at the National People's Congress meeting in Beijing.