Paraphrasing Nixon, have the Chinese become Keynesians now, too?

I don’t believe so.

China’s proposed $586 billion dollar stimulus plan sure generated a lot of excitement this past weekend. It was amusing to watch the SPX futures tick up on this supposed new program. Especially when we compare it with the $170 billion in tax rebates this summer — The Economic Stimulus Act of 2008 — which was only 1% of GDP of the US, versus about 18% of China’s GDP.

But is China’s plan really a new stimulus? The short answer is no, and it took the market about half a day to figure this out yesterday.

Why? Compare China — a country with a centrally planned economy, carefully managed by a communist regime — with the United States. The US has a $14 trillion economy, of which about $3 trillion is government spending (military, entitlements, discretionary). Any new stimulus plan — be it tax rebates, direct spending on public works programs, or aid to the auto industry — is essentially new spending that didn’t previously exist.

When $3 trillion becomes $3.17 trillion, it is significant. It is as if the US is adding more pieces to the economic chess board.

China, on the other hand, is merely moving resources from one region to another. They are not creating more economic activity, putting cash in the hands of consumers, or even increasing their infrastructure plans.

“Bullishness in Asia on Monday was tempered by questions about how much of China’s plan is actually new — or is simply a repackaging of past commitments, such as the rebuilding effort following the Sichuan earthquake. Investors appeared to question estimates that Beijing would spend another 6% to 7% of its gross domestic product in each year of the plan, as the raw numbers of the plan would suggest. . .

Beijing may be prepared to add extra stimulus. A Beijing think tank, the China Academy of Social Sciences, said Monday it has submitted a report to economic policy makers outlining ways for the government to offset stock-market panic. One suggestion is to deploy as much as $115 billion to buy shares in the stock market’s 50 biggest companies if the Shanghai Composite Index slips to 1500. The market remains 64% below last year’s close.

The package didn’t address one big question about China’s economic-policy plans: whether it will stoke its own domestic demand by letting the yuan rise, or act defensively to let the currency fall to relieve pressure on its own exporters.”

On their economic chess board, all they are doing is moving pieces about. But they are not actually adding  anything to the board.

This Chinese economic stimulus plan is a contradiction in terms.


chart courtesy of WSJ


Further reading:
Budget of the United States Government

Budget of the United States Government
Fiscal Year 2009

China’s Stimulus Plan Cheers Markets, But Doubts Remain
WSJ, NOVEMBER 11, 2008

China’s Stimulus Plan: Repackaged and Misdirected
Derek Scissors, Ph.D.
Heritage Foundation, November 10, 2008

China Announces $586 Billion Stimulus Package
WSJ, NOVEMBER 10, 2008

Category: Current Affairs, Economy, Markets, Taxes and Policy

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

25 Responses to “China’s Stimulus Plan Is No Such Thing”

  1. “China, on the other hand, is merely moving resources from one region to another. ”

    Please explain further. From what I understand they are going to spend $587 billion of their reserves?

  2. VennData says:

    The Soviets had their Five Year Plan, North Korea still has a new stimulus plan every seven years, too. Juche, Baby.

  3. jmborchers says:

    Actually, I really couldn’t give a crap what China does. They will fall and fall hard because they are dependant on our US funds coming in. Now they are stuck.

  4. Per Bloomberg

    This is what happens when you get downgraded like Genworth did

    You get kicked out of the Fed programs.

    So I wouldn’t expect anyone to get downgraded anytime soon.

    Owner Earnings At Blogspot

  5. Archiphage says:

    “When $3 trillion becomes $3.17 trillion, it is significant. It is as if the US is adding more pieces to the economic chess board.

    China, on the other hand, is merely moving resources from one region to another. ”

    Ummm… So the US can create real resources by wishing them into existence, and the Chinese cannot? If those crafty Asians ever learn this trick we are done for! I’m going to go wish me a bagel out of the aether and hope those red SOBs never figure out the secret to our success.


    BR: Yes. Its the difference:

    1) The difference between having a private sector that is not a small piece of a centrally directed government, versus a private sector that is 75% of the economy;


    2) Having the world’s reserve currency . . .

  6. anotherrecord says:

    Barry, I have noticed that newsflashr and your “new” website are almost always “out of sink”. That is, if I go directly to your site it is usually different then what is posted at newsflashr….

  7. matt says:

    “On their economic chess board, all they are doing is moving pieces about. But they are not actually adding anything to the board.”

    This is false. It is fiscal expansion, just like the U.S. stimulus.

    Professor Pettis, of Peking University in Beijing, writes extensively about Chinese markets and has written two long posts about the stimulus:

  8. Archiphage says:

    Aha! So those Commies *do* know how we create something from nothing! They probably got the secret during the Clinton years when Bill & Hill were letting the Middle Kingdom buy whatever secrets they wanted. (With money laundered through Indonesian investment groups, of course.)
    We’re doomed. DOOMED!

  9. jmborchers says:

    I feel like buying today. Red book has sales down 1% from last year. That’s not so bad. Oil price maybe starting to effect retail. And how did Mcdonald’s sales go up? That bothers my short positions as well.

    I’ll be covering early here in the shadow of darkness.

  10. Archiphage says:

    McDonald’s sales went up because you can buy 50 delicious double cheeseburgers for what you would have spent for 2 meals at Outback. If I cared about fundamentals, such considerations would not make me bullish. (Except for on MCD.)

  11. jmborchers says:

    I like doing the opposite of the futures.

  12. Archiphage says:

    for jmborchers;

    That’s probably as good a way to pick an entry as anything else. I’m usually a trend follower rather than a fader, but I don’t worry much about entries anyway, preferring to focus on exits, sizing, and consistent action in the face of equity swings.

  13. Byno says:

    Money for nothing is an old trick.

    Now, if they figure out the “chicks for free” part, panic.

    …custom kitchen deliver-erur-erur-aay. We got to move these, refrigerators…

  14. dash says:

    Stimulus from the US does not “add anything to the board”.

    Stimulus can be paid for in one of three ways:
    1. Raise debt through bond issuance
    2. Raise taxes
    3. Print money

    Selling Treasury bonds siphons money from the market that might otherwise be put to productive use. Printing money is done at the expense of the currency and raising taxes takes money out of our pockets.

    How is this not just “moving pieces around”? In fact, the Chinese may choose to spend from their reserve, which would indeed be “adding to the board” and would be at the expense of US bondholders since it implies that, at the least, China will not be adding to their reserve.

  15. Mangudai says:

    Neither the Chinese or the US gov can create any resources, only borrow from the private sector. Hence strictly speaking no new money is ever added to the pot.

  16. dead hobo says:

    China is reported to be spending massive amounts of this money on infrastructure, as opposed to the US way of stimulus, which involves bookie bailouts using newly printed money. Credit in China is being loosened so that lenders can be more generous in rural China. I guess this is what happens in a well run and relatively efficient economy.

    The difference between us and the Red Menace is that they spend on things and people, similar to FDR and the New Deal. We live on borrowed money, make Hail Mary plays in the hope that unlimited credit will ultimately generate tax revenues, use the borrowed money to create bigger pools of borrowed money, and base this stupidity on Republican ideology, an uncritical media, and half witted academics. Thieves just saw an opportunity and did what came naturally. In a sense you can’t really blame the crooks.

  17. jmborchers says:

    I’m all changed over. Let’s see how she goes.

  18. Archiphage says:

    for BR:
    Isn’t that just the difference between a burglar who robs homes on Millionaire’s Row instead of Skid Row? Mismanaging the world’s reserve currency just means there are that many more pockets to pick. Or to use your metaphor, the US just has more pieces to move around a larger board than do the Chinese… not that either player is capable of making more pieces.

  19. MikeDonnelly says:

    interesting take, for example how much did the Olympics cost? well that spending is now off the table and perhaps this plan just replaces it, so net-net not much change from a Keynesian persective. it’s not to say that the Chinese cannot increase G spending, it’s just in a command economy we don’t know how much they would have spend otherwise.

  20. Greg0658 says:

    jmborchers @ Nov 11 2008 at 7:39 am
    Actually … me thinks your wrong and its time America starts reverse engineering the Asian way of doing business before its to late

    what if they nationalize our 1/2 flying flag factories after a satellite shoot down war and launch an air bourne ranger landing with Boeing transports
    NOT really probable (but possible)
    (China if I were you I’d checkover the transports from one end to the other)(damn thats un-American of me)

    Of course a hexi century age old culture will need the factorys ready to provide internally. The measures to watch for are internal component manufacturing vs external import sales. Internal natural resource mining vs external import sales and stockpiles starting.

    I am left wondering whos flag is playing us Americans? Is the Revolutionary War won and over? I think it never is in Capitalism.

  21. Pat G. says:

    Yesterday, when the DOW was up 200 points the talking heads on CNBC attributed it to the Chinese stimulus plan and the benefit that plan would provide to the global economy. Later as the rally faded that was attributed to the realization that if the Chinese were putting $600B to work in infrastructure then that money wouldn’t be available to buy our debt. How pathetic!

  22. Mike in Nola says:

    Here’s an opinion from someone living and teaching in Bejing. Seems to have credentials and most of wha the has said in the past was credible. Down at the bottom of the blog page is an RSS link:

  23. DL says:

    FXI was a nice short yesterday. Probably still a good short.

  24. sinomania says:

    Where are you getting your facts on China? The CIA factbook? Old copies of TIME magazine?

    The private sector accounts for close to 2/3 of China’s economy now. “Communist” “Command Economy” “5 Year Plan” — these are all buzz words, propaganda. China’s economy most closely resembles Germany and both officially describe themselves as a “socialist market economy”.

    The stimulus plan includes important tax-reduction initiatives to benefit private companies and individuals, particulary changing the VAT, giving businesses significant tax savings.

    There are 10 specific areas of investment in the stimulus package – from building rural housing to subsidizing research centers – if you seriously interested in this topic you could easily find this information.

  25. sinomania says:

    So we effectively nationalize our biggests banks, insurance, auto companies but China is the “communist” “command economy”? These are outdated buzz words. Your sources — the WSJ and the Heritage Foundation — are indicitive of old school bias.

    The private sector now accounts for around 2/3 of the Chinese economy. There are 10 specific points of government investing in the stimulus package from directly building housing and infrastructure (roads, railroads) to subsidizing research centers to tax-reduction initiatives for indivuals and businesses. On the latter Morgan Stanley says:

    … the impact of VAT conversion [from production to consumption base] will likely be quite significant. We estimate that the potential aggregate tax savings for the VAT-paying enterprises as a result of this policy change could be in the range of Rmb150-200 billion in 2009, or about 0.5-0.7% of GDP. The sectoral impact varies, depending on the share of machinery and equipment purchase in total fixed-asset investment for each sector.

    There is a lot more to China’s stimulus than just a shell game.