China has a tradition of defining destitution abstemiously, perhaps in an effort to keep the poverty count low and the relief bill down. But this week's decision raises China's poverty line close to or even above the World Bank's global standard of $1.25 per day. That standard is widely misunderstood. It is calculated not at market exchange rates, but at purchasing-power parity rates, which take account of the lower prices prevailing in poor countries. China's new, higher line qualifies 100m more people for a variety of benefits. That is good news for China's poor, and also good news for China's slowing economy. An official measure of manufacturing activity, based on surveys of purchasing managers, dropped to 49 on December 1st, its lowest reading since January 2009 (see chart). Managers feel business worsened or stagnated in November, compared with the month before.
Europe's woes must account for much of this disappointment. The rest of the blame probably lies with the government's efforts to fight inflation by tightening the supply of money and credit. For the past couple of months it has been “fine-tuning” this policy, easing up on some things, but not on others. On November 30th it opted for something more dramatic, cutting the amounts that banks must keep in reserve at the central bank by 0.5 percentage points.
That should ease the credit crunch that hurt many businesses over the summer. The fear, however, is that freeing the banks could lead to a lending spree like the one that rescued China from the previous crisis. That lending saddled many local governments with debts they are struggling to repay. These loans will be rolled over once, according to reports. But if local governments still need a bail-out after that, they will have to cede some of their budgetary freedoms to Beijing. That is how fiscal federalism works—as Europe is about to discover.
If China's slowdown remains modest, the government may get away with modest monetary measures: loosening the reins on the banks, without letting go. But if the economy deteriorates sharply, the government may lean more heavily on fiscal remedies. The central government is flush with cash, taking in 28% more in revenue this year than over the same period last year. And excessive lending to the banks' traditional borrowers (state-owned enterprises and local governments) will help the economy less than extra spending on neglected constituencies, such as the 128m rural poor. If China is worried about the economic winter ahead, it should fatten up its skeletal welfare programmes, not its bloated banking system.
