We have gotten so large to throwing large numbers around in the US thanks to the various Fed facilities that the significance of the Chinese move may not be as obvious as it would otherwise be.
$586 billion is a massive number for an economy the size of China’s. Recall our first stimulus package here was $150 billion, and a second that is assumed to total $300 billion is under discussion. China’s economy on a purchasing power parity basis is estimated to be about $7 trillion dollars as of 2007, versus its size at then current exchange rates of just under $3 trillion. By contrast, the US economy was just under $13 trillion, so if you accept the larger PPP value, the Chinese stimulus package would be tantamount to a $1.1 trillion program here (and even larger if you use the nominal exchange rate).
An offsetting factor is that our first stimulus package was a single shot, while the total amount of the Chinese initiative will be deployed over two years. The report in the Wall Street Journal also suggests that some of the spending may have already been in the works (ie, there may be some double counting).
Nevertheless, this means, as we have suggested, that the Chinese economy is likely decelerating faster than was commonly believed. It also means the Chinese officialdom is not at all willing to let growth slow far enough to risk social unrest. It will take some time to discern whether they succeed in the latter objective.
From the Wall Street Journal:
China’s government announced a two-year stimulus exceeding a half-trillion dollars to offset the impact of slowing global growth and unlock the spending power of its vast population.
Premier Wen Jiabao’s cabinet set plans for 4 trillion yuan, or $586 billion, in spending and stimulus measures through the end of 2010 aimed specifically to target people’s livelihood, the official Xinhua News Agency said Sunday night.
It was unclear how much the plan, which will target 10 areas from rural infrastructure to low-cost housing, represents new spending and how quickly it can stimulate domestic demand.
The government also will adopt an “active” fiscal policy — meaning it will spend money and cut taxes — while the central bank will set a “moderately easy” tone that appears to signal further interest rate cuts and efforts to make banks boost lending, Xinhua said.
China’s economy grew at the slowest rate in five years in the third quarter, slipping to 9% from the year before….
Economists say that while China remains a hopeful source of global growth, its momentum is pulling back more quickly than anticipated. Property prices are under downward pressure, factories are closing as export orders dry up and foreign direct investment is being called into doubt…
In Sunday’s statement, the government said that among its earmarks will be money for transportation networks, ecology, technical innovation and post-disaster reconstruction. Few specific details on the spending plans were immediately announced.
Other measures include a restructuring of value-added taxes that Xinhua said will reduce business taxes by 120 billion yuan annually. The government will also look for banks to boost lending, removing a government-set lending ceiling and encouraging them to offer credit to smaller businesses, rural borrowers, technical innovators and buyout-oriented firms…
Many economists have been looking for Beijing to unveil a big stimulus package similar to the one it relied on during the Asian Financial Crisis more than a decade ago. Then, Beijing issued massive amounts of domestic bonds to pay to extend highways, repair airports and build ports, a program that was deemed a strong success.
Just a year ago, China had adopted an unprecedented “tight” monetary policy, a step up in its three-year effort to keep the fast-growing economy from barreling out of control because it was expanding too quickly.
The idea that banks are expected to lend more, particularly to a list of borrowers that look risky, is worrisome. China’s banks carried a lot of bad debt and while the situation has allegedly improved, some observers saw them as a potential point of instability even in their somewhat cleaned up state.
From the Financial Times:
China announced on Friday a “massive infrastructure spending programme” as part of a new fiscal stimulus plan aimed at boosting the country’s rapidly slowing economy.
The State Council, China’s cabinet, authorised Rmb4,000bn ($586bn) of investment on infrastructure and social welfare over the next two years, although it did not say how much of the spending would be on new projects not already in the budget…
The announcement reflects mounting anxiety in Beijing that China’s economy is cooling much more quickly than was initially expected in the face of weaker international demand and a slowdown in the local property market.
Two recent surveys of manufacturers showed a slump in activity in October, confirming anecdotal evidence that the slowdown has accelerated in recent weeks. Some economists believe that growth, which was nearly 12 per cent last year, could fall to as low as 6 per cent next year without a substantial fiscal stimulus.
Beijing has also been under growing international pressure to take fiscal measures to boost its economy in the hope that continued strong growth can provide some counter-balance to recession in the developed world.
The government has already cut interest rates three times, scrapped quotas for bank lending and unveiled measures to help housebuyers and some exporters. However, economists said those measures had not been enough to overcome growing gloominess among companies and consumers…
The investments will focus on low-income housing, water, electricity, disaster relief and transport, with railways expected to see a big increase. Spending in the fourth quarter of this year would be boosted by Rmb120bn beyond what was planned.