Thread: China Acts with a Huge Bailout

China Acts with a Huge Bailout
Monday, 10 November 2008


Concerned about a rapidly cooling economy, China acts dramatically to shore it up

Increasingly concerned about its slowing economy, China’s State Council Sunday got around to doing what been expected since the second quarter of the year – creating a gigantic Rmb4 trillion (US$586 billion) stimulus package to prop up investment and consumer confidence and keep retail spending from collapsing altogether.

As evidence of its concern, Beijing abruptly called back China's Finance Minister, Xie Xuren, from the 15th annual Asia-Pacific Economic Cooperation conference in Peru even before the meeting began on November 6, apparently on orders to help resolve problems at home.

The package does send China into the G-20 meeting of the world’s economic leaders in Washington, DC on November 15 well ahead of other countries. The European Union and the United States have been flailing for the past several months in their attempts to stave off economic disaster. The US has special problems, with the lame-duck administration of President George W. Bush, already enervated by eight years in power, getting ready to leave office, and the new administration of President-elect Barack Obama not ready to take power until the inauguration on January 20.

All indications so far are that China intends to take care of itself first despite increasingly desperate requests for help from Washington, DC. China is still feeling its way into a global role and it appears that its main intention is to support efforts to reverse the global crisis by ensuring that its own growth, expected to drift down to 8 to 8.5 percent in 2009, doesn’t collapse. The economic situation almost certainly puts paid to any desire on the part of the leadership to allow the currency to float upwards, even despite threats from the west, including from Obama, to name China a currency manipulator.

It is also questionable, however, how the country can pour that amount of money into its economy that quickly. With an annual economy of about US$3.54 trillion, the plan calls for spending 7 percent of gross domestic product each year by 2010. Although plans have been on the books for quite some time for a lot of the infrastructure spending, pushing it through the country’s notoriously corrupt and inefficient bureaucracy could raise serious problems.

Until fairly recently, Beijing’s confidence in the world’s fastest-growing economy was complete. Gross domestic product had been steadily increasing at a near 10-percent clip for the better part of a decade. The country, and particularly Guangdong, had become the workshop to the world.

But then the air inevitably started to leak out. The first concern was auto sales, which began to plummet at the beginning at 2008 before picking up in September. By July, the National Development and Reform Commission reported that unsold car inventories had risen 50 percent from the beginning of the year to a four-year high. Rising inventories of consumer products and slowing growth began to suggest a self-reinforcing cycle of gloom for the economy and financial sector. Industrial output fell to 11.4 percent in September, steel output went negative, and cement growth was only 0.8 percent annually. Both residential and commercial property sales and the stock markets plummeted.

Strong points remain. Retail sales growth hit 23.2 percent year-on-year in September, exports remained strong at 21.5 percent, imports were up to 21.3 percent and China continued to maintain a healthy trade surplus of nearly US$30billion for the month.

Nonetheless, figures that for most countries would spell torrid growth spell serious alarm for China’s leaders in a country where incomes average US$605 per year for the 800 million rural dwellers. Beijing remains extremely concerned about maintaining stability and delivered up a larger-than-expected package to seek to prop up confidence. Unlike almost any other country, China has the money to expend from its whopping foreign currency reserves

“We believe it highlights the government’s heightened concerns about the rapidly worsening economic environment in recent weeks and their willingness to take necessary measures to prevent the economy from slowing significantly in the coming quarters. Alongside recent shifts in monetary policy—and the recent moves to ease policy in other parts of the world—this is clearly another significant step towards combating global economic risks,” wrote Goldman Sachs economist Yu Song in an analysis of the package.

The 10-part US$586 billion package includes money for affordable housing, water, power grid, rural roads and irrigation systems for rural dwellers, new rail passenger lines into western China, improving its expressways, building airports in western China, major spending for urban sewage, solid waste, and water pollution. Some 312 million people in rural areas have no access to safe drinking water, according to the United Nations.

The government package also directs spending to local medical systems, which virtually collapsed in the transition from a communist to capitalist economy. By 2007, government spending had fallen to 15 percent of the country’s annual budget, well below even the 21 percent the United States spends on Medicare and Medicaid in a system that most health care experts describe as glaringly inadequate for an industrialized country.

More spending is to be directed to the rebuilding of the country’s devastated earthquake areas, where local outrage has grown over substandard school construction that crushed thousands of students. Income subsidies are to be granted to raise grain purchase prices from peasants and provide direct subsidies as well. Both urban and rural social security and welfare are to be improved. Consumer credit on the part of China’s state-owned banks is also to be encouraged and value added tax reform is designed to reduce enterprise burdens by Rmb120 billion (US$17.58 billion).

Will it all be enough? Probably not. Most analysts believe the global slowdown is so marked that all China can do is ameliorate the slowdown, although amping up the China economy can be expected to have a positive effect on regional economies such as Japan, Korea and Taiwan which export into the mainland. Otherwise, external events are beyond its control. Even today, despite the fast growth of the consumer economy, China remains an export-oriented country and the Pearl River Delta – Hong Kong’s hinterland – is estimated to lose as many as 2.5 million jobs as toy and textile manufacturers and others close shop.

Here’s the chart that really matters:



asiasentinel.com


that's torn it ....................

last couple of days we've been reading from the Thai pollies how China is to be the saviour for Thailand .

.

Somehow I have these terrible visions of a world without squeaky rubber dog toys.

Impact of financial crisis on China 'worse than expected': Wen
Thursday November 13, 2008 14:00

BEIJING (AFP) - China's Premier Wen Jiabao said the effect of the global financial meltdown on the country was "worse than expected," state media said Thursday, in a sign of growing concern at the impact of the crisis.

Wen was quoted as making the assessment by the director of the National Bureau of Statistics Ma Jiantang when he briefed his staff on Tuesday, according to the website of the bureau's newspaper China Information News.

"The impact of the global financial crisis on the Chinese economy is much worse than many had expected," Ma said according to the website, passing on remarks made by Wen.

China initially said the global financial crisis would not cause too much harm to its economy, but in recent days the signals from Beijing have changed markedly.

Wen's comment comes after the Chinese government unveiled a four trillion yuan (586 billion dollars) economic stimulus plan on Sunday aimed at boosting domestic consumer demand in the face of flagging exports.

bangkokpost.com

Originally Posted by Mid

All indications so far are that China intends to take care of itself first despite increasingly desperate requests for help from Washington, DC.

Suppose I can't blame them, but not good news for the US.

a much better headline

Asia Sentinel - China Gets it Right, the US gets it Wrong

China Gets it Right, the US gets it Wrong

The US stimulus package is too little, too late, thrown at the wrong sectors of the economy

The announcement of China's massive stimulus package of almost US$600 billion shows that the country means business not just in reviving, but also in rejuvenating its economy.
As both America and China confront the prospect of a global depression, both have chosen to fend off potential unrest with liberal government spending. But the Chinese move is bolder and more likely to succeed.
The most remarkable aspect of the Chinese stimulus plan is its enormous size. Despite the massive publicity surrounding its formidable growth rate, the Chinese economy is still ‘only’ one-fifth the size of America’s. Relative to its economy, China’s stimulus package would be the equivalent of a US$3 trillion package in America.
The Bush-Greenspan asset booms were so extreme, and the resulting deleveraging so massive, that government actions in multiples of trillions of dollars are needed to make any meaningful impact in slowing the asset bust.
Based on this yardstick we can see that the differences in the Chinese and American approaches could not be more dramatic. The divergence bodes ill for the future.
The impact equivalent of China’s package of US$3 trillion is 17.4 times that of America’s US$172 billion. Of course, this does not include the US$700 billion Bush TARP that was agreed to by Congress last month. But then, China did not have a financial system which needed a massive taxpayer bailout.
Although some Chinese investors may have been taken in by smart Wall Street salesmen peddling mortgage-backed securities, the scale of these investments does not present systemic risk to China’s financial markets.
China has announced that the lion’s share of its stimulus spending will focus on modernizing the infrastructure of its country in preparation for challenging America as a super power in just a few more years.
In contrast, the focus of the Bush Administration plan is to boost consumer spending. America’s decaying infrastructure has been virtually ignored. This will render America’s economy ever less competitive in an increasingly competitive world.

Even the follow-up packages in America are likely to throw increasing amounts of taxpayer money at highly leveraged banks and failed corporations, like General Motors.
When the world recovers from the looming depression, China will emerge greatly strengthened and as a far more serious challenger for super power status.
Since the ancient times of Babylon, super power status also has been reflected in any uber nation’s currency. While China’s economy is dominated by roaring manufacturing and infrastructure development, America’s economy is comprised of 72 percent by consumers. In reality, America is consuming more than it produces and is eroding its national wealth at an alarming rate.
In contrast, emerging nations like Brazil, Russia, India, and China (the so-called BRIC nations) are producing far more than they consume and are creating real wealth in the process. It follows that BRIC corporations and even their currencies should be attractive long-term investments, relative to those of the United States.
On November 15th, the G-20 leaders meet in Washington to discuss threats faced by the world economy. Today, there is decreasing faith in paper currency. The G-20 leaders must address this crucial problem. It may well be that they seize this opportunity to establish an international currency, under the auspices of the IMF, but linked to gold.
Should they fail, a resurgent China can be expected to veto any subsequent attempts in an effort to replace the US dollar with its own as the world’s key ‘anchor’ or reserve currency. Such a change in reserve status would confer on China a number of competitive advantages previously reserved for America.
Unlike America, China is unlikely to borrow to finance its stimulus package. Indeed, it is likely to spend its own national earnings rather than continue to invest in US Treasuries.
Worse still, China might even begin to sell part of its massive holdings of some US$1 trillion of US Treasuries. This will put upward pressure on U.S. interest rates, tending to drive a recession into a depression.
However it is financed, China's stimulus package is decidedly bad news for America.

John Browne is senior market strategist – Euro Pacific Capital, Inc. of Darien, Connecticut, USA. Euro Capital publishes the free, on-line investment newsletter Subscribe to Euro Pacific Capital's FREE Newsletter

While China’s economy is dominated by roaring manufacturing

yesterday , maybe picture is currently changing at a frightening pace .