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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.
Posted by Tyler Cowen on November 9, 2008 at 06:06 PM in Current Affairs | Permalink
Comments
Headline tomorrow: China economic stimulus dwarfs that of U.S.
Posted by: MM at Nov 9, 2008 6:35:25 PM
If it's mostly a public relations move (I doubt it), the message being conveyed would be: don't count on us to bail out your sorry asses, we're hanging on to our money for our own purposes. As Calculated Risk points out, the consequences for the US, which is seeking to fill some truly extraordinary funding requirements over the next year, will be interesting.
Posted by: at Nov 9, 2008 11:07:01 PM
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.
Posted by: Andy at Nov 9, 2008 11:08:41 PM
I guess Roosevelt's New Deal infrastructure construction was what the US should have done anyway.
Sure the earthquake money was what was going to be spent anyway, but even there, as part of the stimulus package, China has moved at least $30 billion earthquake reconstruction money that was originally allocated for 2010 forward to 2009.
Don't know what you mean by "anyway". China's economic stimulus in 1997 was quite useful in combating the Asian financial crisis, but you would probably say the airports, railroads etc should have been built anyway. But without the Asian financial crisis, the magnitude of infrastructure construction during that period surely would have been much smaller.
Posted by: carolinian at Nov 9, 2008 11:13:08 PM
the new york times often feels like such a loser when it comes to China coverage.
Posted by: NYT at Nov 9, 2008 11:16:30 PM
I guess Roosevelt's new deal constructions were money that the US should have been spent anyway.
Don't know what you mean by "anyway". China's 1997 economic stimulus was quite successful in dealing with the Asian financial crisis that year. You may say the airports and railroads should have been constructed anyway, but without the Asian crisis, the magnitude of the infrastructure building during those years would surely be much smaller.
Even the earthquake money in this current package, which indeed should be spent anyway, at least $30 billion that was originally allocated for 2010 have been moved forward to 2009.
Addendum: why was this comment deleted? I had to post it twice.
Posted by: carolinian at Nov 9, 2008 11:24:40 PM
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.
Posted by: Bocalocaj at Nov 10, 2008 12:27:04 AM
"...Most of this money would've been spent anyway..."
On What?
A pointless war somewhere in the Middle East? You're saying there's no difference between investing in infrastructure and investing in killing people?
Another example of the shallow commentary so prevalent on this blog by two economists pretending to be deep thinkers. It's the intellectual version of the O'Reilly Show for all I care.
Posted by: sammy at Nov 10, 2008 1:46:12 AM
"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.
Posted by: MM at Nov 10, 2008 2:07:15 AM
"Addendum: why was this comment deleted? I had to post it twice."
It wasn't. If you've posted here before you would know how quirky the system is. Your comment now appears twice.
As I noted above, I don't believe the issue is whether China would have spent "this much" money on infrastructure, as it's clear they would have. Accelerating that spending could be beneficial, certainly, given the longevity of Chinese planning it could be that in the end this is not 'new' money just money spent more quickly.
Posted by: MM at Nov 10, 2008 2:10:25 AM
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."
Posted by: P. Stone at Nov 10, 2008 4:52:37 AM
The size of China's stimulus package is astounding in comparison to the size of its economy vs. the USA's bailout packages (thus far) and America's economy.
chsw
Posted by: chsw at Nov 10, 2008 8:04:58 AM
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?
Posted by: kurt at Nov 10, 2008 8:08:41 AM
Sammy, these guys are providing a blog for free. If you want something better than what they give you, why not look for it? Or if you think they could supply what you want, you could offer them a price.
Or you might show them your own blog as an example of what you like, and if they see how great it is maybe they'll be inspired to copy you?
Your questions about economics are worth asking. But your tone makes it less likely you'll get answers.
Posted by: J Thomas at Nov 10, 2008 8:20:50 AM
J thomas: your comment
PRICELESS!!!
Posted by: nyongesa at Nov 10, 2008 8:41:16 AM
"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."
What is the distinction between those?
If china has planned out what infrastructure they think they need, and now they want to build it faster with new money, what else would you expect?
Would they suddenly tear up their plans and spend the money in new ways that don't fit the plans?
Speeding construction makes sense to me as follows: They would like to spend dollars before we inflate the dollars or impose trade barriers etc. But what do they want to buy from us? Food. Luxury foods they could consume, or staples which they'd have to store. And raw materials particularly construction stuff. Lumber, dryboard, cement, maybe some steel if the price is right.
We used to compete with them for US construction materials because we were on a construction kick ourselves. But ours is over now. So they might expect they could get that stuff cheaper.
Remember that these guys are communists at heart. They believe in the labor theory of value. Whenever a man wants to work, to contribute to society and get rewarded for it and he isn't allowed to do so, he has been robbed and so has society. They have hundreds of millions of underemployed, people who do subsistence agriculture because the chinese economy hasn't yet found a use for them.
The guy who says china is overinvesting -- they have labor being wasted. Why would chinese society rest and consume the fruits of their work when with more investment they can increase production? The result is more work done, more chinese allowed to work, more to go around when they feel they can afford to consume.
I would expect them to think that they are wasting nothing to do more construction. To the extent they use dollars to buy US raw materials and construction equipment etc; the dollars will evaporate anyway. To the extent they use labor that would otherwise be unused, the real cost is likewise nil. If the new construction does some good then fine. If they have mis-planned and it is useless, their opportunity cost is zilch -- all the resources would be lost if not used, and so the alternative to compare against is a better plan that they do not have.
I may have misunderstood their thinking. I am not a communist myself and look at it from the outside.
Posted by: J Thomas at Nov 10, 2008 8:53:10 AM
"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?
Posted by: Owner Earnings at Nov 10, 2008 8:21:24 PM
To J Thomas: You cherry-pick my argument, Sir. I agree that China has a lot of idle labor. I am not convinced that it is as underemployed as you assert - my guess would be a Chinese peasant doing, as you note, subsistence agriculture, is not useful for much else without extensive and expensive training. I also argue that a lot of the investment undertaken and to be undertaken is wasteful - yes, you can build a new road, and that would employ quite a few people for a while, but that road may well not be needed. This kind of spending is just a version of the broken window fallacy in disguise. Now, of course, the Chinese government has "social harmony" as a much more important consideration, but they also are running into the annoying problem that building industrial zones, airports, dams, roads, railroads, etc. tends to displace those same peasants from the land they do not technically own, but view as theirs. Hence, even from behind the Great Firewall, reports abound of folks attacking police and municipal authorities, bombing buildings, rioting, etc. I am only suggesting that maybe stimulating Chinese consumption may be a better way to stimulate the economy - and I do not know enough to suggest the best way to do this.
Regards!
Posted by: P. Stone at Nov 10, 2008 9:05:52 PM
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?
Posted by: J Thomas at Nov 10, 2008 10:22:48 PM
"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?"
Hear, hear! And the next logically-following question: Who will be buying the US T-bonds they might try to sell? They already own a boatload. Can you see yields/interest rates spiking up?
Regards!
Posted by: P. Stone at Nov 11, 2008 8:17:32 PM
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.)
Posted by: BRICTour at Jan 9, 2009 8:34:54 PM
Low-income households, being the target of the stimulus package should consider what will happen next if they would accept the stimulus package. For sure they will be one of the affected groups in the future. Due to poverty they may be wondering if they’re going to get a stimulus check. Knowing that is the reason why there are some stimuli scams starting to pop up. Ads promising extra funds from the economic stimulus package, but requiring a fee to get the know-how are the usual stimulus scams. These scams can run people dry if they get their hooks in deep enough.
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