The Chinese economic stimulus package

China on Sunday announced a huge economic stimulus package aimed at bolstering its weakening economy and perhaps helping fight the effects of a global economic slowdown.  In a sweeping move at a time when major projects are being put off
around the world, Beijing said it would spend an estimated $586 billion
by 2010 on wide array of national infrastructure and social welfare
projects, including constructing new railways, subways, airports and
rebuilding communities devastated by an earthquake in southwest China
in May.

Here is the story.  Most of this money they would have spent anyway, so what is the net change in the stimulus?  And over how many years is this sum spent?  I think of this as mostly a public relations move.  China wants to tell other countries it is doing lots and it wants to tell its own citizens that it feels their pain and is pro-active.

Is there a gentle way to glide down from 10 to 5 percent growth?  I tend to doubt it.  Are you prepared for a China with negative economic growth for a few years (or more)?  I tend to doubt that too.

Matt Yglesias has interesting commentary; I guess now we’ll see how much an economic surplus is worth when the core macro problem is something other than lack of aggregate nominal demand.

Addendum: Here is further comment.

Comments

Headline tomorrow: China economic stimulus dwarfs that of U.S.

Undoubtedly there are going to be tough times ahead with a worldwide recession underway, but there is reason to have hope as these massive and widespread global rescue plans start to take affect over the coming months. The next 12 months could reprsent the best investing opportunity for generations to come.

the new york times often feels like such a loser when it comes to China coverage.

This seems to be a move that will allow China to lower the price of its currency (or at least not raise the price) without other nations getting upset. If US or others start threatening import duties on Chinese goods again because of the cheap Yuan, then China will be able to point back to this package and say that yuan is cheap simply because the supply was increased.

"On What?"

On the same stuff the Chinese are announcing they're going to spend it on?

"You're saying there's no difference between investing in infrastructure and investing in killing people?"

Utterly nonsensical to the content. Are you posting on the right blog?

Given that China has obviously been investing heavily in infrastructure and had clearly planned to continue doing so, it will be difficult to sort out whether this is simply an acceleration of planned spending or whether they plan on actually sinking in new money. I think it's reasonable to wonder if a good deal of it might not be the former than the latter.

Hmmm, China would appear to already have a significant problem with over-investment - hardly a surprise when an economy invests over 40% of GDP in infrastructure. Empty buildings and $100 million airports that handle a few dozen passengers a day abound. And yet the advice you have for them is to ramp up investment further? Keep the bubble inflated - hey, why should it pop NOW, it just might disappear later, if we close our eyes really tightly and pretend it is not there?

Or†¦ maybe, just maybe, China might have to realize that after a binge comes a hangover, and brace for it. China has a ridiculously high saving rate, and currently (with US and world demand for their exports not so hot) not many smart investment projects. Sure, there are always “bridge to nowhere† projects†¦ but eventually even a huge dollar stash will vanish. Government spending makes for a nice patch during times of weak demand if your infrastructure investment had been neglected for a while, but if you are already in an over-investment hole, should you not stop digging?

Example from http://www.economist.com/daily/news/displaystory.cfm?story_id=11021130 :
"The inclination to invest in white-elephant projects, for example, appears undiminished. Chinese engineers recently completed a new 108-km, US$20m highway to Mount Everest and hope to open it for the planned Olympic torch relay through Tibet in June, when 300 runners are scheduled to carry the flame."

Why are they 'stimulating' the economy, which can only lead to more inflation on top of the enormous inflation they already have, and thus lower real incomes for the Chinese people. Are they worried about the formation of a Chinese middle class that will demand more political liberties?

J thomas: your comment

PRICELESS!!!

"China announced a 4 trillion yuan ($586 billion) stimulus plan"

That begs the question: Who is going to buy all the new treasury bonds that have yet to be issued?

P. Stone, yes, I cherry-picked your argument, I used only the bit that was useful to me at the moment.

I don't disagree with you. I think they might see it as using things that would otherwise be wasted, for a possible reward. To the extent that they use surplus labor and US imports, they're probably right. To the extent they use oil that is in limited supply, it isn't. And you point out other constraints, they have the opportunity cost on the land they use, the surplus labor might not have the needed training, and the gamble may not pay off.

Your argument in favor of consumption has obvious merit. To some extent they could take the same things they now export and distribute them to their own population. Their workers get to feel like things are going better. And it doesn't cost them anything they weren't already paying -- one way they ship stuff to the USA in exchange for dollars that will become worthless before they can be spent, the other way their own people get to enjoy the stuff.

I think it's an open question how much the chinese public wants that. Do they want to spend or do they want to save? When there isn't much to buy then saving is the obvious choice. If the chinese workers want to go on saving, they can use the capital to build up their productivity and put more people to work, and it's an open question for the future where the market will be. If they choose to start consuming just when they run out of productive investments, they might do pretty well like that.

Or they could put a lot of money into their military. They might possibly feel like they need that.

Or if they have a clear idea what kind of development they think they need, they might go ahead and do that development with the idea it will give them more capability to make consumer goods, or munitions, or even more investment, later.

Owner Earnings has a good question. If the chinese put a whole lof of investment into their own nation, who's going to buy the US T-bonds that they won't be buying?

It's interesting to compare China to countries similar in size, development, and economic growth (such as the BRI of BRIC). The US is not the only basis for comparison and probably not even the best one, as the US economy is at a very different stage economically.

I started a rough comparison at my blog, located here: http://brictour.blogspot.com/2009/01/bric-recessions-and-stimulus-packages.html

I'd love to hear from any of your readers more familiar with the recession (and economic stimulus packages) for each individual country.

(By the way, I will be visiting the BRIC countries this Spring and would love any input from your readers about people I should talk to about economic issues.)

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