China Acknowledges the Mistakes of Past Stimulus Spending

Backing away from a dead-end tactic:

In theory, inflation’s sharp fall in recent months — to a low of 1.8 percent in July — should give policy makers room to inject more energy into the flagging economy.

In practice, however, the authorities must still navigate a minefield of unintended consequences. More determined stimulus measures could help the economy regain momentum and resuscitate the investment demand that is crucial to China’s growth model.

But they also could produce nasty side effects of the sort that followed a huge stimulus package in the wake of the financial crisis in late 2008. Combined with lower interest rates and a flood of bank lending, the spending package helped the economy bounce back quickly in 2009. However, it also led to high inflation, soaring property prices and an increase in loans that could ultimately go sour.

The concern that property prices could once again flare up is probably one of the main factors prompting Beijing to delay more sweeping policy action for the moment, said Minggao Shen, a Greater China economist at Citi in Hong Kong.

Via As Growth Flags, China Shies From Stimulus – New York

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