Or, you can log in or sign up using Forbes. Sign up|Log in Gordon G. Chang, Contributor I write primarily on China, Asia, and nuclear proliferation. China "Mini-Stimulus" Is Maxi Mistakecomments, called-out Comment Now Follow Comments Following Comments Unfollow Comments Comment Now Follow Comments Following Comments Unfollow Comments On Wednesday, Premier Li Keqiang made what has been described as China’s first stimulus announcement of 2014. The “mini-stimulus” plan will extend large tax breaks to small businesses, build social housing to replace shanty villages, and accelerate the building of rail lines. The announcement followed a major policy address Li made on March 26. “We have gathered experience from successfully battling the economic downturn last year and we have policies in store to counter economic volatility for this year,” he said then. “We will launch relevant and forceful measures according to what we have planned in our government work report. Analysts, by and large, were not impressed with Li’s words in late March. As Du Changchun of Northeast Securities in Shanghai said to Reuters at the time, “The market reaction really hasn’t been that great as these comments have been said many times before. What Li needed to do last week was to show that he had the right policies to stabilize an economy that is deteriorating quickly. Observers expect this year’s first quarter to be the weakest in five years. So how did the markets react to Wednesday’s mini-stimulus? On Thursday, the Shanghai Composite fell, but it recovered most of its losses Friday. Li, therefore, largely failed to bolster sentiment. And that’s what his announcement last week was all about. As Julian Evans-Pritchard of Capital Economics in Singapore noted, “They want to make it clear they have the ability to step in if necessary. At this point, Li and his technocrats look like they do not have that ability. The principal problem is that they are still struggling with the ill effects of Wen Jiabao’s stimulus plan, announced in November 2008, to spend 4 trillion yuan. The legacy of that effort, which when combined with bank lending was one of the biggest fiscal spending programs in the last 15 years, is a country choking on debt. China’s total debt-to-GDP ratio is now somewhere north of 300% when GDP is properly adjusted—deflated—to account for price changes. The symptoms of China’s debt accumulation are alarming. There have been, within just the space of a month, the first domestic corporate bond default in the history of the People’s Republic, the first domestic junk bond default, and two bank runs. Most important, the country is running out of uses to which stimulus money can be profitably devoted. Developers have stopped projects, and construction starts have collapsed. Premier Li, however, had few options last week. If he had announced a bigger spending plan to overpower the market with state money, he might have actually signaled panic and therefore triggered a loss in confidence. In short, China’s investment-led growth model has just passed the point of exhaustion. The premier announced an inadequate plan because he obviously felt he had no other choice. One choice Li could have made was to implement meaningful reforms. He and his colleagues on the Politburo Standing Committee have been talking about major reform since they were installed in November 2012, but they have never gotten around to implementing structural change. Instead, they have presided over a period that, on balance, has been marked by the reversal of reform. Reversal of reform? With their various stimulus programs, both announced and unannounced, they have taken China even further away from its only sustainable growth model, one based on consumption. Analysts last week chose to ignore the obvious warning signs. “This should buy time to implement reform measures,” noted Qu Hongbin and Sun Junwei of HSBC, reflecting what has become the majority view about Li’s Wednesday announcement. In short, Qu and Sun believe that Premier Li, by authorizing even more investment in what can only be described as an anti-reform move, is paving the way for . . . reform. It should be clear by now that Chinese leaders, despite what they continually say, feel they cannot implement structural reform. If they felt they could do so, they would have put those reforms in place by now. Li, although thought to be a reformer, apparently does not have support for change. Despite the obvious need for fundamental restructuring, he did not announce, at the National People’s Congress meeting last month, a reduction in the country’s growth target for this year. This year, the target remains 7.5%. The implementation of reforms will undercut growth at first, so the unwillingness to accept lower growth rates this year is a sign that entrenched interests are blocking change. It’s clear why Li has not been able to take real steps to implement reform. The economy has become so unbalanced and precarious that any withdrawal of stimulus would, in all probability, lead to a quick erosion of growth. If the economy were allowed to slow, defaults would multiply and lead to a general loss of confidence and fall in asset values, what economists call the Minsky moment. So the lesson from Premier Li’s announcement on Wednesday is that, with the possible exception of depreciating the renminbi, he no longer has effective policy tools at his disposal. Like everyone else, he will watch the Chinese economy come apart. Please log in or sign up to comment. Forbes writers have the ability to call out member comments they find particularly interesting. Called-out comments are highlighted across the Forbes network. You'll be notified if your comment is called out. Gordon G. I lived and worked in Shanghai and Hong Kong for almost two decades and now write primarily on China, Asia, and nuclear proliferation. I am the author of two Random House books, The Coming Collapse of China and Nuclear Showdown: North Korea Takes On the World. My writings have appeared in The New York Times, The Wall Street Journal, Barron’s, Commentary, and The Weekly Standard, among other publications. I blog at World Affairs Journal. I have given briefings in Washington and other capitals and have appeared on CNN, Fox News, MSNBC, Fox Business, Bloomberg, CNBC, and PBS. I served two terms as a trustee of Cornell University. The author is a Forbes contributor. The opinions expressed are those of the writer. More from Gordon G. Follow Gordon G. Gordon G. Gordon G. Gordon G. Gordon G. Sequoia Capital leads the list of investors this year. 2014 Forbes. 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