That is what a number of banks and media want you to believe when it comes to China’s just announced 4 trillion stimulus plan. To be sure, some of the funding, maybe as much as 1/2 have already been allocated and maybe another 1/4 are not new as there has been talk about the need for a stimulus plan for China for a while. That leaves 1/4 that may be really, really new. So why do I not want to curb my enthusiasm about the response?
1. I spoke with friends at the State Council, CASS, PBOC, CSRC and some think tanks yesterday and tonight just to make sure this is not just another smoke and mirrors Chinese announcement going into the Nov. 15 meeting in Washington – during which time President Hu will have a special meeting with President Bush, I have been told. They say, and I believe, that nearly 1/2 is previously unallocated funding. That adds up to between 1.5-2 trillion yuan, or about 3.5% of nominal GDP for each of the next two years, using the 1.5 trillion mark.
2. The rest of the funds were allocated but have not been spent. Look at it as a budgetary process in the US. The President submits a budget in February, Congress usually begins to hold hearings in March, the process continues through the summer and into the fall and the appropriations for spending are usually finalized by the beginning of the new fiscal year on October 1. That is what has happened with the so-called previously allocated funded part of this package. Now the funds, all 4 trillion will begin to be spent over the next two years, as there are special tags – the 40-50% new part – are added. That is on top of what will be roughly a 29.5 trillion yuan nominal GDP economy at the end of this year. So, it is adding about 6.5% to the nominal economy next year and about 5.5% in 2010. In real terms, it will add about 1.5 percentage points to the printed (included) GDP for next year and about 1 percentage point in 2010. It will add about 2.5 percentage points to the “real” unprinted GDP next year as, I have noted before, the real economy is growing around 7%.
3. The stimulus represents something bigger. It says that China is standing firmly behind its economy!
4. What does it mean for the real economy and growth? Any stimulus package takes a quarter or two to begin to work its way through the economy. This package, in my opinion, will not begin to affect real growth until at least Q2/2009. That will allow China time to work off its excess inventories of goods and commodities (principally coal, oil, steel and copper). The significant impact will be at the end of next year and in 2010. Well, guess what should also be happening by that time? Even the most pessimistic forecasts of US and EU economic growth see those economies growing by then. That is when there will be an upswing in commodities prices. No, it will happen before then, as the combination of monetary/fiscal actions re-stimulate growth before then.
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CURB THAT ENTHUSIASM!
That is what a number of banks and media want you to believe when it comes to China’s just announced 4 trillion stimulus plan. To be sure, some of the funding, maybe as much as 1/2 have already been allocated and maybe another 1/4 are not new as there has been talk about the need for a stimulus plan for China for a while. That leaves 1/4 that may be really, really new. So why do I not want to curb my enthusiasm about the response?
1. I spoke with friends at the State Council, CASS, PBOC, CSRC and some think tanks yesterday and tonight just to make sure this is not just another smoke and mirrors Chinese announcement going into the Nov. 15 meeting in Washington – during which time President Hu will have a special meeting with President Bush, I have been told. They say, and I believe, that nearly 1/2 is previously unallocated funding. That adds up to between 1.5-2 trillion yuan, or about 3.5% of nominal GDP for each of the next two years, using the 1.5 trillion mark.
2. The rest of the funds were allocated but have not been spent. Look at it as a budgetary process in the US. The President submits a budget in February, Congress usually begins to hold hearings in March, the process continues through the summer and into the fall and the appropriations for spending are usually finalized by the beginning of the new fiscal year on October 1. That is what has happened with the so-called previously allocated funded part of this package. Now the funds, all 4 trillion will begin to be spent over the next two years, as there are special tags – the 40-50% new part – are added. That is on top of what will be roughly a 29.5 trillion yuan nominal GDP economy at the end of this year. So, it is adding about 6.5% to the nominal economy next year and about 5.5% in 2010. In real terms, it will add about 1.5 percentage points to the printed (included) GDP for next year and about 1 percentage point in 2010. It will add about 2.5 percentage points to the “real” unprinted GDP next year as, I have noted before, the real economy is growing around 7%.
3. The stimulus represents something bigger. It says that China is standing firmly behind its economy!
4. What does it mean for the real economy and growth? Any stimulus package takes a quarter or two to begin to work its way through the economy. This package, in my opinion, will not begin to affect real growth until at least Q2/2009. That will allow China time to work off its excess inventories of goods and commodities (principally coal, oil, steel and copper). The significant impact will be at the end of next year and in 2010. Well, guess what should also be happening by that time? Even the most pessimistic forecasts of US and EU economic growth see those economies growing by then. That is when there will be an upswing in commodities prices. No, it will happen before then, as the combination of monetary/fiscal actions re-stimulate growth before then.
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