Massive China Stimulus is Viewed as an Attempt to Help the West

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By William Patalon III
Executive Editor
Money Morning/The Money Map Report

The half-trillion-dollar stimulus package that China unveiled on Sunday underscores that country’s growing importance to the global economy and shows Beijing’s willingness to assume a leadership role in the battle to blunt a widening worldwide financial crisis, a top expert on China said yesterday (Monday).

“China understands that it’s gaining importance in the world economy and that it’s going to participate in that process,” said Keith Fitz-Gerald, Money Morning’s investment director and a former professional trade advisor who’s spent more than two decades focusing on investment opportunities in China, Japan and the rest of the Asia region.

“Many experts will see this as just a ‘bailout’ that’s directed at Chinese infrastructure projects, Chinese technology companies and at holding the global financial crisis at bay” Fitz-Gerald said. “But the real message here is that Beijing is going to pull out all the stops to ensure that its economy does not falter. And that’s because China realizes that it’s become the super glue that’s holding the rest of the planet together.”

China on Sunday unveiled what it described as a “massive” economic stimulus package – a planned capital infusion of $586 billion that it plans to use to reverse its slowing domestic growth, to loosen domestic credit and to offset factory shutdowns and massive job losses caused by an evisceration of its export sector. Analysts also expect export growth to stall and actually reach zero in the months to come as global demand almost completely dries up.

In making this move, China becomes the latest major country to announce a stimulus package, following such nations as the United States, Germany and Japan. Governments have been injecting billions of dollars into their economies, as central banks around the world slash interest rates, all in the hope of avoiding a whopper global recession. Just last week, researchers at the International Monetary Fund (IMF) said that world growth would slow to a tepid 2.2% next year, down from the 3.7% growth estimated for this year. The IMF forecast for China slashed the growth rate down to 8.5% next year, down from an earlier projection of 9.3%.

But the world’s fourth-largest economy has almost reached the so-called “tipping point” – where increases in domestic demand can almost offset the loss of export revenue. So it wants to offset slowing global growth by stoking domestic demand – both to help itself and to remain enough of an economic oasis to possibly keep the global financial crisis from becoming a total financial rout. With record foreign reserves of nearly $2 trillion, China is in an excellent position to bring such financial firepower to bear on this growing global crisis, Money Morning’s Fitz-Gerald has repeatedly stated.

“To the extent that people are still worried that China will fall apart because of the global credit crisis – well, that remains an unknown,” Fitz-Gerald said. “However, I would point out that China is still on track for 9.6% growth, and that even if they were to get a recession, their growth is still going to be seven or eight times what ours [here in the United States] is projected to be.”
China’s plan calls for boosted spending on roads, airports and other infrastructure projects, tax deductions for exporters, and increased aid to farmers and to the nation’s poor. China’s high-tech sector is expected to be a big recipient, as will its fledgling aerospace sector. Spending on education will increase, and so will outlays for healthcare and environmental-protection programs.
For this stimulus package to work, China will need corporate investment and bank lending for rural projects, smaller companies and consumers. Beijing might supply one-quarter of the announced spending, or $145 billion, with the rest coming from increased investment by Chinese state companies, bank lending or bond sales by local authorities for individual projects, Ting Lu, a Merrill Lynch & Co. Inc. (MER) economist, told The Associated Press.

"Many state companies have a lot of cash,” Lu said. “They just need to use it.”

The Xinhua News Agency – China’s state-run news agency and the operator of China Radio International, the nation’s global shortwave broadcasting service – said late Sunday that the stimulus package represents “a shift long advocated by analysts of the Chinese economy and by some within the government. It comes amid indications that economic growth, exports and various industries are slowing.”

The decision was announced Sunday by the State Council after Premier Wen Jiabao presided over an executive meeting Wednesday. China reported in late October that its economy grew at a less-than-expected rate of 9% in the third quarter – its lowest level in five years and the fifth straight quarter that growth has slowed, MarketWatch.com reported.

At that meeting, Wen told government leaders that China must increase investment and consumer spending, maintain export growth, enhance corporate competitiveness, reform financial industries and improve the real estate industry so that it is able to grow in a healthy manner, according to a report read out on state television.

“We must implement the measures to ensure a fast and stable economic development,” Wen told those government leaders, the television report stated. “They are not only the needs of the development of ourselves, but also our biggest contribution to the world.”

China unveiled this huge financial package before President Hu Jintao attends a meeting of world leaders in Washington this week. The meeting is supposed to be a forum in which the leaders can discuss responses to the global crisis.

With this huge planned outlay, China has taken yet another giant step back from the anti-inflation measures and lending curbs that the Beijing central government has put in place over the past three years – only to start rolling them back since the middle part of this year because of mounting government alarm over falling exports and slowing economic growth. Those very real worries induced the government to embrace “dual targets” of nurturing continued frenetic economic growth while at the same time working to contain price increases. In that vein, Beijing has lifted limits on how much each China-based bank may lend and also cut interest rates three times in the past several weeks.

“As the global outlook deteriorates, we expect Chinese macro policy to turn increasingly aggressive," Lu, the Merrill Lynch economist, and colleague T.J. Bond wrote in a research report Friday. “This is a key theme for China and indeed, the entire Asian region.”

This stimulus package will certainly provide a major boost to the Asia region. But its effects will be felt worldwide, says Money Morning’s Fitz-Gerald.

Westerners are “going to look at this stimulus package as a case of China trying to save its own butt,” Fitz-Gerald said. “What they don’t understand is that China views this as a case of them saving ours. That’s the big difference.”

[Editor’s Note: Money Morning Investment Director Keith Fitz-Gerald has spent more than two decades studying the Asian financial markets, and spends part of each year living in Japan. Fitz-Gerald is the editor of The New China Trader investing service, an affiliate of Money Morning. And last year, he headed a two-week investment tour into China, a sojourn that led to a multi-part Money Morning series about investing in China. Watch for Fitz-Gerald's 2009 forecast for the U.S. stock market, the latest installment of Money Morning's "Outlook 2009" economic forecasting series. Fitz-Gerald's forecast is scheduled to run tomorrow (Wednesday). For a related story on China investments elsewhere in this issue, please click here.]

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About the Author

Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish… and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.

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  1. Tom Pawluk | November 11, 2008

    I had to giggle at your response to the Chinese spending on railroads. We, ( THE USA ) have probably one of the most expensive distribution systems in the world and with that you would have to call it ineffecient. The cost per mile of transpoting over road versus rail is ridiculous. Other cultures invest for the longterm while we are always short term benefits for the few.I'm sure when fuel gets high enough, we'll finally decide that the rail system needs attention. By that time it will be to late. The cost will be out of hand and the future generations will look at us as imbiciles. I would like personally like to thank the the automobile and oil industry who contrived to decimate cheap disribution. That's a whole different issue altogther. Thank you for your time.

  2. Jon Strieter | November 12, 2008

    Thanks Tom for your comment regarding infrastructure and railroads. It will take this country years to reconstruct what once was the best system of transportation available in this country and possibly in the world. I only hope we have the sense to do it now and not wait until it becomes even more expensive. Reconstruction of our own infrastructure would lead the way out of the financial crisis that has been created by greed and the desire for short term profits at the expense of the environment and our children's future. Let's hope that our new president follows through with this needed work. And that he has the backing to do it.

  3. Helena Young | January 8, 2009

    I am your reader form China,thank you for mailing me everyday ! as you know,China announced it's $586 billion stimulus package last few months.we all learnt in economics that the gov's financial policy infuse capital to the market firstly,people earn more,people spend more,then they will need more?blah blah blah……but I think it may not be so effective as expected.
    firstly,the gov's money can't be received by most chinese, the benefited are who works in state company like Huawei you mentioned(I work in state company,too),they're just a small part out of the more poor,further more,the chinese are very good at saving instead of spending.and the whole country's health-care systerm is so aweak that common people are scared even to see a doctor when get sick,it's the truth!because they know it will cost them so much!secondly,government put not enough money to education for a long time,especially high education.and even more,the rising housing prices make the commom chinese dared to spent their savings.strangely,we chinese treat having a house of our own quite importent,this is the other factor why they just seal their llet in everyway.But how could anyone dare to devour all his possession when he has not enough ensurene in his health-care,children's education,and a house for living!

Trackbacks

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  4. [...] record foreign reserves of $1.9 trillion, China also approved a “fast and heavy-handed” $586 billion stimulus, mainly in housing and infrastructure, to be implemented through 2010.  And the Chinese yuan [...]

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