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China’s Visionary Stimulus

SHANGHAI – In March of last year, the first session of China’s 12th National People’s Congress began with then-Premier Wen Jiabao delivering his tenth and final “report on the work of the government.” When he had finished, the 3,000 representatives in attendance gave him a resounding ovation that was surely a response to more than the report; it was a display of praise and respect for his achievements as the head of China’s government.

Since then, however, assessments of Wen’s leadership – particularly his stewardship of the economy – have varied widely. Whereas Wen’s supporters remain adamant that he fundamentally supported a shift toward democracy and a market economy for China, his critics lambast him for failing to fulfill his promises of political and economic reform. As Wen’s successor, Li Keqiang, attempts to engineer deep systemic reforms, understanding Wen’s policy decisions could not be more relevant.

Wen’s most contentious economic policy was the CN¥4 trillion ($586 billion) stimulus package that his government launched in response to the 2008 financial crisis. Though the policy succeeded in buttressing China’s economic growth, it was widely criticized as an overreaction – one that led to excessive monetary expansion.

Indeed, the surge in bank loans caused China’s M2 (a broad measure of the money supply) to soar, from 150% of GDP in 2008 to some 200%, or more than CN¥100 trillion, today. The massive injection of liquidity into China’s economy has contributed to rising debt, especially among local governments and firms, while fueling massive real-estate bubbles, and resulting in significant excess capacity.