China Unveils Monster Stimulus Package

[donsutherland1]

Bloomberg.com reported, "China pledged a 4 trillion yuan ($586 billion) stimulus plan to prop up growth in the fourth-largest economy as the world heads toward a recession." According to the IMF's World Economic Database, the stimulus package would amount to 13.9% of China's estimated 2008 GDP.

To put things further into perspective, the stimulus package is almost three times the size of the U.S. financial system rescue package. The Chinese package would be the equivalent of $2.003 trillion (against U.S. Q3 GDP).

Separately, the G-20 announced that it is prepared to take measures, including interest rate cuts and spending increases, to bolster economic growth.

On account of the enormous Chinese stimulus package, a highly likely U.S. stimulus package--possibly prior to President-elect Obama's taking office--and further interest rate reductions, some of the gloom that has been weighing down on equities could lift. Although the above developments will not rapidly lift the U.S. from its current recession, they do offer at least a prospect that policy makers are laying a foundation for recovery. As such, stocks could be cheered by the news at Monday's opening. As a result, stocks will likely open higher.

 

[WI Crippler]

How much further can we cut interest rates? It seems like we've been cutting them for 2 years now?

 

[MC.no.spin]

Bloomberg.com reported, "China pledged a 4 trillion yuan ($586 billion) stimulus plan to prop up growth in the fourth-largest economy as the world heads toward a recession." According to the IMF's World Economic Database, the stimulus package would amount to 13.9% of China's estimated 2008 GDP.

To put things further into perspective, the stimulus package is almost three times the size of the U.S. financial system rescue package. The Chinese package would be the equivalent of $2.003 trillion (against U.S. Q3 GDP).

Separately, the G-20 announced that it is prepared to take measures, including interest rate cuts and spending increases, to bolster economic growth.

On account of the enormous Chinese stimulus package, a highly likely U.S. stimulus package--possibly prior to President-elect Obama's taking office--and further interest rate reductions, some of the gloom that has been weighing down on equities could lift. Although the above developments will not rapidly lift the U.S. from its current recession, they do offer at least a prospect that policy makers are laying a foundation for recovery. As such, stocks could be cheered by the news at Monday's opening. As a result, stocks will likely open higher.

That's very interesting. It mainly indicates to me how robust China's balance sheet is compared to the U.S. I am having difficulty assimilating how this will lead to a more positive outlook on domestic stocks. The stimulus package for the U.S. has been discussed for weeks, and Bush has made no indications he will be approving one. It may take until January for such a package to be unveiled in the U.S.

It would appear that the U.S. affects China's economy more than China affects our economy's revenues across the spectrum, besides high technology products and services. I don't have the numbers breakdown however to see how this package could bolster our own GDP.

For companies that do business in both China and the U.S., such as automakers, this is very good news indeed.

 

[donsutherland1]

How much further can we cut interest rates? It seems like we've been cutting them for 2 years now?

There's room to cut the rates somewhat further and I expect a 25 bp cut when the Fed meets on December 16, especially if the threat of deflation increases. Key price data will be released over the next ten days:

• November 14: Import and export prices
• November 18: Producer Price Index
• November 19: Consumer Price Index

Rates in Europe and other developed countries are likely to continue to be cut in the months ahead.

In the U.S. fiscal policy will need to play a larger role. Hence, Fed Chairman Bernanke has backed the idea of a carefully targeted and temporary stimulus that would be designed so as to avoid increasing the nation's structural deficit. Such a stimulus package will be adoped in the near-term, possibly even before President-elect Obama takes office. If not, then President-elect Obama indicated that such a stimulus package would be his top priority.

 

[donsutherland1]

That's very interesting. It mainly indicates to me how robust China's balance sheet is compared to the U.S.

China presently has foreign exchange reserves of more than $1.6 trillion. Its 2008 current account surplus is expected to exceed $350 billion. So, China is in a very strong financial situation.

I am having difficulty assimilating how this will lead to a more positive outlook on domestic stocks.

The package will likely give a lift to Asia's growing economies. It will also entail China's enlarging its domestic economy, which would reduce the prospect of China's factories dumping excess inventory onto the world market. Were China's factories to do so, that would have a fairly robust deflationary impact. With the U.S. experiencing strong disinflation and deflation expectations on the rise, such a development could prove very hazardous to the U.S. economy. Hence, with that prospect being alleviated by China's stimulus package, there should be an initial boost for U.S. stocks at the open of trading.

The stimulus package for the U.S. has been discussed for weeks, and Bush has made no indications he will be approving one. It may take until January for such a package to be unveiled in the U.S.

President Bush and President-elect Obama will be meeting tomorrow. President Bush has been very cooperative in paving the way for a smooth transition. If President-elect Obama wants a stimulus badly and urgently enough, President Bush might not stand in the way. In any case, it is a matter of "when" not "if" with respect to a second stimulus package.

It would appear that the U.S. affects China's economy more than China affects our economy's revenues across the spectrum, besides high technology products and services. I don't have the numbers breakdown however to see how this package could bolster our own GDP.

It does. In large part, the slowing U.S. and European economies, led to a contraction of manufacturing activity in China due to reduced exports. China is using its fiscal stimulus package to reduce its reliance on exports. The package's size--the equivalent of just over $2 trillion U.S. and nearly 60% of the fiscal cost expended during Japan's 1990s-early 2000s economic crisis--highlights the degree of importance China is placing on stimulating its domestic economy.

 

[donsutherland1]

Stocks rose broadly at the open. Fifteen minutes into trading, the Dow Jones Industrials was up 190 points (2.0%).

CNN reported:

Stocks surged Monday morning, with the Dow Jones industrial average rising as much as 215 points, after the U.S. government unveiled a sweeping restructuring plan for AIG and China announced a massive stimulus package...

Asian markets ended Monday's session sharply higher after China unveiled a $586 billion stimulus package. European shares advanced in morning trading.

 

[Kushinator]

I have a couple questions:

In what form would the Chinese stimulus take? Meaning, is this going to be direct government spending on infrastructure, education, capital investment, etc...?

Secondly, does China have a relatively high propensity to consume domestic goods?

 

[donsutherland1]

In what form would the Chinese stimulus take? Meaning, is this going to be direct government spending on infrastructure, education, capital investment, etc...?

China's package consists of a combination of spending and tax measures. Some highlights:

• A cut in China's value-added tax (VAT)
• Road/power grid improvements in rural areas
• Construction of affordable housing
• Accelerated expansion of a national transport network (railways and airports)
• Increased health and education expenditures
• Investment in energy conservation and pollution control
• Increased farm subsidies
• Investment for industrial restructuring and development of high-tech industries

In effect, the package appears designed not only to stimulate China's economy at a time when its export growth is slowing due to economic downturns in the U.S., Europe, and Japan, but also to lay a foundation for helping China's economy continue an upward migration beyond manufacturing and beyond its coastal regions where most of its economic activity is presently situated.

Secondly, does China have a relatively high propensity to consume domestic goods?

I don't have detailed data concerning the consumption patterns of Chinese consumers. However, it should be noted that imports account for 15% of U.S. GDP and just over 25% of China's GDP. As a result, it appears that China has a reasonably high propensity to consume domestic goods.

 

[donsutherland1]

Another point that bears mentioning is that from the perspective of China's national interest, its stimulus package could be brilliant.

First, it allows China the ability to undertake an aggresive investment campaign aimed at developing high tech industries under the cover of stimulating its domestic economy. Doing so could at this point in time when the world's attention is focused on economic contractions, stabilizing financial systems, and providing fiscal stimulus packages could translate into a less aggressive response by competitors who might otherwise fear prospective competition from China were the investments to be announced separately.

Second, it allows China to become less reliant, in time, on exports for growth. Reduced reliance on exports would allow China to better balance its overall macroeconomic risks.

Third, it commits a sizable share of China's financial resources. This commitment reduces its overall options in such fashion that it now has a credible reason to decline significantly increasing its risk exposure to U.S. debt. Hence, China would face less exposure to currency risk should the U.S. dollar decline on account of increased reliance on overseas capital to finance its burgeoning budget deficits. Over time, China could parlay such an approach into a more diverse holding of currencies and foreign securities.

 

[metreon]

I don't have the numbers breakdown however to see how this package could bolster our own GDP.

It was mentioned on the Lehrer News Hour yesterday that the Chinese stimulus package would direct a lot of cash toward building up infrastructure, as also mentioned by don. This would entail the purchase of construction machinery, most of which they import from the U.S. So companies associated with heavy construction like Caterpillar and such would benefit.

Moreover, Chinese have a high rate of savings unlike Americans. Their government is also running a budget surplus. Both public and private sectors are well-situated to ride out bumps in economic growth. Because of this, even in the present economic downturn, their economic growth represents 1/3 of the world's economic growth rate now.

Many developing countries are similarly leading economic growth in the world now, and it was reported that half of the world's growth rate was from such developing countries. I presume they were talking about countries such as India. Supposedly that is why western nations now are looking to China and other developing countries to help lead the world out of this recession.

 

[Onion Eater]

China presently has foreign exchange reserves of more than $1.6 trillion. Its 2008 current account surplus is expected to exceed $350 billion. So, China is in a very strong financial situation.

Three cheers for the Chinese. Let's hope that they don't use all that money to build battleships and kick our ass.

The weak link for the Chinese is that they are just as dependent on Middle Eastern oil as we are. But the difference is that we have a straight shot across the Atlantic to bring in tankers while the Chinese must bring them through a long route that winds past many islands - very difficult to defend.

In the event of world war, assuming that we beat the Iranians thoroughly enough that they cannot keep the Strait of Hormuz closed, we can get oil from the Middle East. But China would need a vastly expanded navy to secure oil shipments. They have billions of potential soldiers - fighting them on the ground would be hopeless unless we can starve them of oil. At least in the beginning of the war, we will fight the Chinese mostly at sea.

Let us hope that war is not in the cards. But just a heads up on what it will be like if that is where we are heading.

 

[Onion Eater]

One more thing about China's stimulus package: A large part of it is for building a modern freeway system.

At this time, freeways in rural China are not needed. The ones that they have now are so under-utilized that local farmers routinely lay their crops on them to dry in the sun. It is true that some farmers have benefited - people who used to carry their crops to market on their backs now load them into trucks - but modern freeways were not needed for that. Simple two-lane highways or even just adding gravel to existing dirt roads would have been sufficient.

So why the freeways? A principle lesson of WWII was that railways cannot survive during wartime. Even the weak and inaccurate (by modern standards) bombers of the day kept the railways shut down without difficulty. One 500-pound bomb can shut down a railroad for weeks while the railbed is re-built to carry the weight of a train. But, on a freeway, all it does is make a small crater. Traffic can drive around the hole and it can be filled in and paved over again in a couple of days.

This lesson was not lost on the U.S. government. During the 1950s, when we were teaching school children to "duck and cover," we also embarked on the far-more-practical program of constructing an interstate freeway system.

Don recently wrote at Krauthammer Understates Significance of Economic Crisis that our financial crisis is far more important than our struggle with Islamic jihadism. He was taken to task by Justone in a long and rather vehement three-part reply.

If I may play the peacemaker here, I want to point out that state-to-state war with Iran and/or China is a very different thing than our ongoing struggle with Islamic jihadism. So you are both correct, to some extent.

Our struggle with Islamic jihadism is not helped by more money nor hampered much by the financial crisis. We already have the ability to kill anybody anywhere in Iraq; our problem is that we don't know where they are. What we need is better intelligence, not bigger bombs.

But war with Iran or, even more so, China, is largely a matter of money. We can beat them in no other way than we beat the Germans in WWI or the Japanese in WWII - basically, they just ran out of money and capitulated.

People tend to think we beat the Japanese by nuking them. But that is not really true; if the Bomb had been a dud, we would have burned Hiroshima a week later. When we burned Tokyo we killed more people than we did in Hiroshima and Nagasaki combined. While the Bomb had a gee-whiz aspect to it, it did not really change anything. We already had the will and the capability to destroy cities.

The real cause of Japan's capitulation is that they ran out of battleships and carriers and didn't have the money to build any more. We could destroy their cities only because we were parked thirty miles off their coast, and we could sit out there unmolested only because the Japanese Navy was at the bottom of the sea and there were no more ships forthcoming.

There was no steel left in Japan. In the end, the Japanese Army was collecting kitchen utensils and pulling wires out of civilian homes on penalty of death for anybody caught hoarding metal. But, if they had had money, they could have commissioned more warships from Germany.

Bottom line: modern state-to-state war is entirely dependent on who has the most money to spend on it. Counter-insurgencies, on the other hand, depend on who has the best intelllegence. And that depends largely on winning the hearts and minds of the civilians among whom the insurgents must operate.

 

[donsutherland1]

Bottom line: modern state-to-state war is entirely dependent on who has the most money to spend on it.

For that reason and the technological innovation that has the best chance to arise out of a vibrant economy, I believe the ongoing economic crisis is potentially the kind of watershed event that can define the next decade or even quarter-century. The economic events have far-reaching economic, social, and geopolitical impacts. Depending on the outcome, there could be some shifts in the balance of power. In a multipolar world, in which China is an ascendant power, a shift in the overall balance of power that cuts against the U.S.--and there is a risk of such an outcome--could have a major impact on international stability. Certainly, it could bring about big changes in the economic and political relations in East Asia.

China's dominance in East Asia would have important implications. A situation in which China and the U.S. vie for dominance in East Asia could have others. A weakened U.S. that turns inward would have still other consequences. One should not dismiss a revival of some of the historic rivalries that marked Asia's history should the balance of power in East Asia grow unstable and/or power vacuums emerge. In such a chaotic environment, a shrinking Japan (population) could well be tempted to throw its technological weight behind the development of nuclear weapons as a means of enhancing its own security. Japan's neighbors could be greatly unsettled by such a move. There are many lines along which East Asia could evolve. A permanently weakened U.S., in relative terms, could produce or hasten either of those outcomes (Chinese dominance in East Asia, a long competition for power and influence between the U.S. and China in East Asia, or a retreat of the U.S. from the region). A debt-driven currency crisis or extended period of deflation could trigger the kind of "lost decade" Japan experienced or worse for the U.S.

My guess remains that a signficant recession short of such an outcome is the most likely scenario. In such a recession, U.S. real GDP would contract by 2%-3% from peak to trough and the unemployment rate would top out between 8%-10%.

Nevertheless, there is a small but distinct possibility of something worse. Such more severe outcomes have followed some collapses of asset bubbles. It is that more severe situation that could produce relative U.S. weakness that could begin to reshape balance of power against the U.S.

In sum, many perils lie ahead. The threat posed by the Islamist radicals is real and significant. But it pales in comparison to the kind of outcome a "lost decade" or worse could bring about for the U.S.

 

[Onion Eater]

In sum, many perils lie ahead. The threat posed by the Islamist radicals is real and significant. But it pales in comparison to the kind of outcome a "lost decade" or worse could bring about for the U.S.

Agreed.

The last "lost decade" that we experienced - the Great Depression - culminated in a world war. And we should not forget that the issues that drove the Japanese to conquest in the 1930s are still there. A militaristic Japan could rise again.

 

[donsutherland1]

Today, Bloomberg.com reported that China may announce a second fiscal stimulus package tomorrow. Bloomberg.com revealed:

Chinese Premier Wen Jiabao is considering new stimulus measures, adding to a 4 trillion yuan ($585 billion) spending plan as the government tries to revive growth in the world’s third-biggest economy.

Wen will announce “a new stimulus package” in his annual address to the nation’s legislature tomorrow, former statistics bureau head Li Deshui told reporters in Beijing today. He didn’t say whether spending would increase or give further details.

While such a development boosted global stock markets and may increase prospects for an economic rebound in China, it could also reduce China's capacity to purchase U.S. Treasuries. Should Chinese demand for Treasuries fall, yields could begin to increase. That could complicate matters should the U.S. government seek a second fiscal stimulus package, something that is probably fairly likely.

 

[WI Crippler]

Today, Bloomberg.com reported that China may announce a second fiscal stimulus package tomorrow. Bloomberg.com revealed:

Chinese Premier Wen Jiabao is considering new stimulus measures, adding to a 4 trillion yuan ($585 billion) spending plan as the government tries to revive growth in the world’s third-biggest economy.

Wen will announce “a new stimulus package” in his annual address to the nation’s legislature tomorrow, former statistics bureau head Li Deshui told reporters in Beijing today. He didn’t say whether spending would increase or give further details.

While such a development boosted global stock markets and may increase prospects for an economic rebound in China, it could also reduce China's capacity to purchase U.S. Treasuries. Should Chinese demand for Treasuries fall, yields could begin to increase. That could complicate matters should the U.S. government seek a second fiscal stimulus package, something that is probably fairly likely.

Wouldn't it techincally be a third package? The first was the stimulus "checks" we got, the second, the stimulus bill that just passed, and your theoretical(but by no means out of line) next stimulus. And thats not counting the "bailout" which I would also consider a stimulus of sorts.

 

[donsutherland1]

Wouldn't it techincally be a third package? The first was the stimulus "checks" we got, the second, the stimulus bill that just passed, and your theoretical(but by no means out of line) next stimulus. And thats not counting the "bailout" which I would also consider a stimulus of sorts.

You are correct. It seems so long ago that I omitted mention of the rebates package. Certainly, the TARP, mortgage relief measure, Fed's temporary liquidity facilities, and additional efforts being undertaken to sustain Fannie Mae, Freddie Mac, Citigroup, Bank of America, AIG, GM, and Chrysler qualify as federal interventions that put taxpayer resources at risk, even if they are not intended to directly increase aggregate demand.

 

[Kushinator]

You are correct. It seems so long ago that I omitted mention of the rebates package. Certainly, the TARP, mortgage relief measure, Fed's temporary liquidity facilities, and additional efforts being undertaken to sustain Fannie Mae, Freddie Mac, Citigroup, Bank of America, AIG, GM, and Chrysler qualify as federal interventions that put taxpayer resources at risk, even if they are not intended to directly increase aggregate demand.

That equates to what, somewhere along the lines of $9 trillion in taxpayer liability?

------------------------------------------------------------------------
Don, what is the deal with China's new stimulus package? It has been hush hush since yesterday, and fears that it was a "balk" sent Asia lower.

 

[donsutherland1]

Goldenboy219,

Two things:

1. The figure of U.S. obligations is probably in the vicinity of $9.8 trillion right now.

2. China ultimately did not announce a new stimulus package per se. They announced a modest increase in overall spending. The additional spending can represent stimulus even as it wasn't a separate stimulus package. However, some of the rumors that were floating late Wednesday e.g., that China could double the stimulus as articulated by Standard Chartered Bank Plc , were strictly rumors. Market expectations appeared to have latched onto those rumors and became unrealistic.

Given that China is a largely closed society so to speak when it comes to disseminating information, I purposely used "may" with respect to the possible additional stimulus even as the Bloomberg report quoted a former Chinese official who used "will."

 

[thabigred]

Time to invest Chinese.