Will China's $586 billion dollar stimulus plan work?

China is jumping on to the stimulus train with a massive economic stimulus package. The government announced last Sunday that it would boost its economy with a RMB 4 trillion ($586 billion) capital injection. Stock markets around the globe cheered with the SSE Composite surging more than 7%. Though excitement was short lived and markets were again in the red the following day.

Some analysts see the impact of the stimulus plan between 1 and 2 percent of GDP in 2009 (see Pettis, Nov. 11) and others have criticized it outright as being not effective enough. Among those is Mr. Pettis, economics professor at Peking University's Guanghua School of Management. Prof. Pettis is an expert in Chinese financial markets and he protests the argument of the Chinese government that the fiscal stimulus plan is intended to offset flagging external demand similar to the successful 1998 fiscal expansion. In his opinion the Chinese economy has dramatically changed since 1998 rendering the current plan less effective.

Pettis, Nov 11:
But, as I argue in Sunday’s entry, conditions have changed dramatically. First, China’s GDP is about 2.5 times bigger today than it was back then, and exports have grown much faster than GDP, so China is far from being a “smallish” country. More importantly, the world is looking for more demand right now, not more supply. In a global system with so much excess capacity, and with a marked tendency to excess savings (Americans have to save more, Asians don’t want to consume more), I am a lot more pessimistic about the domestic impact of China’s fiscal expansion, especially if the goal is to increase investment. The world will not simply absorb a lot more Chinese capacity. This package is only useful to the extent that it boosts real demand, especially if it boosts household demand, but that doesn’t seem to be in the cards.

The rush of Chinese officials to implement the plan is also of concern for Mr. Pettis. He suspects it is partly intended as "a shock to confidence" because the economy might be actually in worse shape than the numbers seem to suggest. Another reason might be the upcoming G20 meeting where China faces additional challenges. For a pragmatist like me this is naturally on top of the list. In any case we have no crystal ball and we have to wait and see how it plays out. The odds are certainly not in favor of this massive stimulus package rescuing the Chinese and the global economic malaise.

Pettis, Nov 11:
Of course part of the rushed timing is probably to head off potential trouble at the upcoming G20 meeting. By announcing such a large headline package, China can argue that it is contributing both to the global monetary easing as well as to global fiscal expansion. This will take the pressure off other demands – for example one way China can contribute to global expansion is by a more radical reforming of the currency regime, and it clearly does not want to do that. October’s trade surplus – announced today – was 20% higher than September’s all-time record. This won’t make it easier to argue that they desperately need to keep the RMB from rising too much.



source: The RMB 4 trillion fiscal engine seems to be losing steam (My Blog)
By Michael Pettis, Nov 11
http://piaohaoreport.sampasite.com/china-financial-markets/blog/The-RMB-4-trillion-fiscal-packag.htm