China economic stimulus is like drinking beer – by Clyde Russell (Reuters U.S. – September 18, 2014)

LAUNCESTON, Australia, Sept 18 (Reuters) – Many years ago my first-year economics lecturer at university used beer to explain the law of diminishing marginal utility.

While the first beer on a Friday night tastes great and gives immense satisfaction, each subsequent drink delivers less until you stop enjoying yourself, and eventually the utility becomes negative at the point where the alcohol makes you ill.

This was one of the few economic theories I grasped instantly as it was relevant and easily understood by an 18-year enjoying the new-found freedom of university life.

These days it strikes me that the law of diminishing marginal utility applies to efforts by the Chinese authorities to stimulate their economy in order to maintain growth close to the target of 7.5 percent per annum.

Each subsequent stimulus effort appears to deliver less of a kick to economic growth, and in some instances just seems to further fuel the imbalances that imperil the Chinese economy.

Of course, not all the stimulus efforts are equal, unlike my beer example, and therefore couldn’t have been expected to deliver equal outcomes. The point is that they appear to be delivering less in the way of economic growth each time, and for shorter periods.

The massive $586 billion package announced in the wake of the 2008 global financial crisis did have the desired effect, with the key industrial output indicator surging from a low 5.4 percent year-on-year growth in November 2008 to 19.2 percent a year later.

However, it was back to 9.3 percent by April 2012, prompting more stimulus measures, said to be worth a total of $300 billion, but spread out over a longer period of time and targeted at specific industry sectors.

A stimulus exercise was repeated in 2013 and much of this year has also seen efforts to boost the economy through these smaller scale, targeted measures, the latest being the injection of 500 billion yuan ($83.4 billion) into the banking system.

The stimulus efforts have generally come in the wake of softer economic numbers, with the most recent examples being industrial output dropping to a near six-year low of 6.9 percent annual growth in August, declining housing investment and prices and slower credit growth.

Each time markets have cheered the policy measures, but the outcomes from the moves appear to have been mixed at best.


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