Comments on: China Announced $586 Billion Stimulus Plan

By: Anonymous

Anonymous — Mon, 10 Nov 2008 12:10:00 +0000

The 5 trillion yuan to rebuild road and port infrastructures was annouced recently and you have to wonder if this is actually a new package? It could be that China is hoping to help its trading partners by trying to put some support into comodity prices. As for US treasuries and can china keep buying them, then I defer to brad setser and would say china will still be running a trade surplus and buying US treasuries. Agency debt though is a very different matter and it looks like mortgage interest rates are likely to climb as investors shun agency debt. The dollar will no doubt be replaced as reserve currency gradually and george soros idea of using IMF special drawing rates seems to me the most likely method to achieve this. Brad setser seems to suggest to me that a US currency of debt crisis is the worst case scenario for the global economy, but is unlikely to happen. I am not so sure and it really depends on whether the US’s own citizens continue to have faith in there currency rather than anything external economies do. Rising unemployment, rising mortgage rates, and very bad commercial news could provide a trigger whereby it becomes apparent that the US may fair worse than other economies.Bailout packages or not the global economy will be walking a tightrope.

By: Andy

Andy — Mon, 10 Nov 2008 03:57:00 +0000

With some type of bailout/rescue plan in place by most major economies in world now, there is hope that the credit crisis can be reigned in sooner rather than later. Undoubtedly there are going to be tough times ahead with a worldwide recession underway, but there is reason to have hope as these massive global rescue plans start to take affect over the coming months.

By: Anonymous

Anonymous — Mon, 10 Nov 2008 03:54:00 +0000

In addition to the large Forex surplus, China also has a government surplus in RMB ... around $220 billion (Hong Kong around $60 billion.) China's public debt is around 16% of GDP.

If you read the 10 targets of the plan ... tax deduction is part of the $580 billion and some of the infrastructure plans listed are already in developement.

The big numbers seems mostly for show give foreign investors confidence in continuing to invest in China as well as signaling to its people and the world that they are being proactive.

By: Stuart

Stuart — Mon, 10 Nov 2008 03:35:00 +0000

buy gold to hedge the collapse in treasuries.

By: Chris

Chris — Mon, 10 Nov 2008 03:01:00 +0000

Looks like this counts as one of the surprises which were anticipated after the Russians and Chinese began to talk about replacing the dollar. At that time remember it was said that well over $2 trillion dollars worth of infrastructure projects in oil and gas, electric generation and freight transport could be identified in Eurasia. This two year package (2009 ans 2010) with its 1500 km of urban rail construction should be seen as part of the total. Medvedev and the Chinese leaders have two more meetings planned before the end of the year.

This will require a lot of oil and gas. Remember the 20 year deal with the Russians? India has also joined the line for access to Russian oil and gas on a long term basis. I noticed Roubini wrote the Russian Chinese deal up as a Russian effor to borrow from China. That seems to be quite a comical misreading of what is going on.

China is promoting the same kind of local currency financing with its Latin American material suppliers. Brazil's President speaking yesterday in Sao Paolo wants to move away from the dollar. Russia, China, India and Brazil, bricks of the new architecture agreed before the G20 meeting to cooperate.

This seems to be a significant, but incremental development, in an evolving pattern which has more surprises to reveal, but will probably only begin to affect thinking here when it becomes clear that the dollar is being by-passed by countries which represent nearly half of the world's population.

Oh, it may be that the issues of trade financing which have been so uniquely presented and discussed here, are fuelling this kind of move away from the dollar to a combination of long term commodity deals plus internal improvements through infrastructure investment. There was a time when the US had no problem with this kind of approach, hopefully it can be that way again.

By: Peter

Peter — Mon, 10 Nov 2008 02:45:00 +0000

If I recall Brad Setser’s analysis of Chinese holdings of American treasuries correctly, most of the treasuries are of a shorter duration – 1 and two year.

China wouldn’t necessarily need to sell their Treasury holdings so much as not allow them to roll over…which might cause Treasury yields to play dead! China could simply collect,rather than reinvest, a good portion of their monies in American short term treasuries to get the dollars needed to fund their bailout.

Now how they can exchange these dollars for yuan without trouble is a good question. Maybe the chicoms will encourage hot money to leave, not as yuan, but as dollars?

By: AAI

AAI — Mon, 10 Nov 2008 02:29:00 +0000

This package sounds like it will create a lot more Chinese production capacity (just as rational business-people there are shuttering it), which is what the DEflation hawks are afraid of… no?

By: Anonymous

Anonymous — Mon, 10 Nov 2008 02:18:00 +0000

Anon 6:30 you could consider FXY alongside TBT.

By: Les Digits

Les Digits — Mon, 10 Nov 2008 00:59:00 +0000

Following on the last comment, does this mean the Chinese government will have to convert $586B of their reserves (mostly in dollar-denominated T-bills) into yuan? If so, it seems like this will have a HUGE impact on the exchange rate, both adding a further burden to Chinese exports and (as some previous commentators mentioned) really really hurt the U.S. ability to borrow? Maybe I don’t understand how this works, or maybe I don’t understand the amounts involved (maybe $586B isn’t all that much), but any clarity would be appreciated.

By: Anonymous

Anonymous — Mon, 10 Nov 2008 00:56:00 +0000

Will the chinese keep buying treasuries? if not, yields are going to soar. meaning the recession will most definitely turn into a depression! Ben’s worst nightmare!