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.
As they agreed in the very recent PACEM summit (a seminal event rapidly forgotten by the senescent Western press), the Chinese are repositioning themselves away from an export dominated economy to one more tied to domestic demand.
Indeed, they now understand that overreliance on linkages with deeply corrupt and profoundly bankrupt Western economies was unwise.
They will weather this storm. They have trillions in the bank, unlike the Western nations that SHOUT so loud about what the Chinese should do.
War is coming to the middle east in the next few week. It will be a hot holiday’s period.
Go long oil!
So what does this mean for USD CNY rates? Does China have to sell any of its foreign reserves to fund this?
Matt— this sounds like Japan all over again after the boom in (private)investment spending went bust, leaving trails of excess capacity .
The hope: Assume countercylical policies. Boost government spending until the consumer begins to pick the tab, which seems unlikely in a country with a propensity to save large amounts of after-tax income.
So Please do tell me how these measures stimulate domestic demand? Will Chinese consumers shop till they drop?
And so much for my hope that huge currency surpluses in the East end up recapitalizing the Western banking system. It appears some of that capital flow will stay inward.
Wonder how that affects the U.S bond market amid record debt issuance?
Can’t agree more about the double counting…just a few weeks ago:
“The government…recently added 750 billion yuan to the investment of 1.2 trillion for the construction of the railway network.”
So railways could account for 50% of the total 4tr amount?(!)
I can’t help but think they are dancing around what really matters in terms of jumpstarting domestic consumption…i have no idea why they didn’t mention healthcare as a focal point of this stimulus when its more than obvious this is what haunts Chinese consumers, according to the results of a Chinese survey last week:
“Eight out of 10 Chinese save money and reduce spending because they do not trust the government to help out when they retire or if they fall sick…76 percent [of the people surveyed] cited high medical costs as the factor forcing them to save”
arrghh…here is the correct link for the railway quote cited above. Sorry, all.
“$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).”
Yves, Thanks for putting up that info. It seemed huge to me, but your figures confirmed that for me.
Don the libertarian Democrat
Who owns the USA:
MAJOR FOREIGN HOLDERS OF TREASURY SECURITIES
(in billions of dollars)
HOLDINGS 1/ AT END OF PERIOD
China, Mainland 541.0
United Kingdom 2/ 307.4
Oil Exporters 3/ 179.8
Carib Bnkng Ctrs 4/ 147.7
Hong Kong 61.2
All Other 139.2
Grand Total 2740.3
Well, guess there s a lot less fresh money going toward the T bills.
Anybody got a exchange rate neutral way to shorting 30 year US treasury? (I mean if I buy TBT, and the treasury yield doubles, the dollar is gonna tank, and I get no profit what so ever)
can someone please tell me where this 586bln comes from? i know the chinese have alomst 4-times this numbers in forex reserves (most of which reside in usdollars)..will this mean exactly paulson’s worst nightmare? will this trigger other central bank dollar holdings to be terminated? this is most intriguing. this sounds like trouble for the usdollar…BIGTIME
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!
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.
Anon 6:30 you could consider FXY alongside TBT.
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?
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?
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.
buy gold to hedge the collapse in treasuries.
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.
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.
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.