China stimulus package seems enormous. But…
Today's Financial News - Posted November 10, 2008
Can today’s commodities revival last in view of China’s much-vaunted stimulus package?
by J. Christoph Amberger
Baltimore — (TFN): Oil and commodities jumped today as China announced that Beijing would spend 4 trillion yuan ($585.5 billion) on infrastructure, housing, rural reform and environmental projects by the end of 2010.
That’s about a fifth of China’s gross domestic product… or a third of its capital reserves.
Was this the intravenous injection of Red Bull into the faltering commodities market? Don’t count on it. Tina Wang, over at Forbes.com, put the numbers into perspective:
“The stimulus package folds in previously anticipated expenditures, such as 1.0 trillion yuan ($146.4 billion) for post- earthquake reconstruction in southwestern China, tax breaks for companies’ capital investment, export rebates to stem the decline in manufacturing and land reform measures meant to reduce the rural-urban income gap. Only 1.5 trillion yuan ($219.6 billion) of the fiscal stimulus is truly new, with 2.5 trillion yuan ($366.2 billion) stemming from previously allocated funds, calculated Bill Belchere, Macquarie Securities’ China economist. ‘The size of the package seems enormous on face value, and it has a short-term beneficial impact on sentiment,’ he said. (…)
“Beijing is pushing against the limits of infrastructure spending and loan expansion, when it is domestic demand that needs to rise to protect China’s growth, the analysts said. Reversing recent efforts to discipline spending, the government’s package raises concerns about excessive investment and ‘may only ultimately exacerbate their problems’.”
The problem with China (and any other system in which the government is the main economic engine) is that $219 billion in new spending will end up with billions squandered on the Chinese equivalent of the Ketchikan Bridge to Nowhere… and an equal amount lost in the Byzantine workings of the corrupt Communist Party nomenklatura.
Pay no attention to the men behind the mirror: China’s systemic problem—its dependence on the West to buy their exports—will not be solved by building bridges across the Yangtze River. Nor will a half trillion, spent over two years, do anything to re-inflate commodities prices to the insane levels China has contractually committed itself to.
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