China Gets It Right, But Hurts America

The announcement of a massive stimulus package of almost $600 billion shows that China 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 countries 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 $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 $3 trillion is 17.4 times that of America’s $172 billion. Of course, this does not include the $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. (GM)

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 U.S. dollar with its own as the world’s key ‘anchor’ or reserve currency. Such a change in reserve status will 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 U.S. Treasuries.

Worse still, China might even begin to sell part of its massive holdings of some $1 Trillion of U.S. 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.

Comments

[Even Walser:]

"Chinese economy is still ‘only’ one-fifth the size of America’s" Not even close. At last count the U.S. had a $14.3 trillion dollar economy. China has a $1.3 trillion dollar economy. If you are referring to purchasing power parity this is a shame that bears little resemblance to reality. Chinese labor may be cheap and thus their dollar goes farther however steels, cement, and almost all other factors of production are produced for a global market and priced in dollar equivalents. Regardless of how cheap labor is China's GDP is nowhere close to 1/5th the size of the U.S.'s. Purchasing power parity (PPP) is a scam. It is far past time that this measurement of economic achievement be put to pasture.

This said there is no doubt that the $600 billion investment plan announced by China is large and will have meaningful impact on their economy.

2008 Nov 13 03:25 AM

[investor88:]

Agree China gets it right and might hurt America. This has longer term implications after the crisis with China emerging relatively stronger.

2008 Nov 13 03:46 AM

[Steven Hansen:]

china is stimulating by infrastructure investment. usa is trying to stimulate using leverage of banks (won't work but another story). if china stimulates itself it will help only china - all of her neighbors agree this is true. if america's method works, the world is helped.

my point here is that i would not point to china's approach and say it is correct. i predict nothing will work. i think for a couple of years we will be in an economic winter.

2008 Nov 13 04:02 AM

[canb888:]

Good reasoning except for the final three paragraphs. JIMHO, China will use cash surplus and issue local currency debt if needed to fund the stimulus and continue to hold huge amount of US Treasury papers. Maybe you should have said a bit more about the economic multiplier effect of the Chinese stimulus of new cash spending vs US bailout that goes to pay for past mistakes without much real new investments, thus little multiplier effect on the economy. China is stimulating, while the US is just firefighting. Imagine a fire and firefighters working hard to put it out, are there any new wealth created by their activities? Now compare that to China building new railways, schools, hospitals, apartments, factories, power stations, upgrade power grid lines, new and renewable energy, R&D, etc. Now you could appreciate the difference in the two plans. However, the China plan will not hurt US economy, it will increase purchases from the US like more Boeing 777 or Caterpillar earth moving machines or GE locomotives. History will be kind to Chinese rulers of today because they are doing some real good things for the country and in the process contributing to the world. Therefore, this is good news for all.

2008 Nov 13 04:32 AM

[winnersdon'...:]

Constant referal to America as the world's only "Superpower" certainly doesn's help the cause of most Americans right now who feel much less of a "super hero" than what's being attributed to them.
Let us not pretent that China is the "bad guy" in the global scenario being played out. China has been, and continues to be, America's banker and manufacturing base.
If not for the Chinese work ethic, America's recession would long ago have developed into a depression. China today is where America was in the 1950's, when more than 50% of America's GDP was relegated to the manufacturing sector. America has lost over 40% in its manufacturing base since that time period, with the results we see today.
Many American's are either angry at, or jealous of the Chinese, but have no one to blame for their dilema but themselves and their own leaders for the past 40 years. Congress and the White House have sold out the American people and continues the sellout.
Unfortunately this is probably the beginning of a painful period for most Americans.

2008 Nov 13 08:03 AM

[Smarty_Pants:]

The author is correct. If China decides to start spending it's USTreasury debt and USDollar reserves on local development it will be very hard on the US.

If they are selling US debt and dollars, then by definition they have stopped buying them. This will drive interest rates up for US debt and drive the value of the dollar down.

Who will fund the US deficit if the Chinese stop lending us the money? If we can't borrow to fund the deficit, will we have the political will to cut gub'mint spending by 30% across the board, or will we simply start printing more dollars and risk hyperinflation down the road? Neither is a very good choice, but those will be the best options we have at that point.

The US gub'mint and people have lived beyond their means for far too long. The bill is about to be presented for payment and it's going to be painful trying to find the money to settle our tab.

2008 Nov 13 10:06 AM

[HaavBline:]

Good reasoning except for the final three paragraphs. I completely agree with canb888's comments. It is way premature to speculate that China even want to replace the Dollar as the world's reserve currency any time soon. The Chinese isn't even ready to make the RMB convertible, which turns out to be a very good decision for them. Fore the intermediate term (a decade or so), China will continue to support US Soverign Debts within reasonable bounds, because China needs a stable world economy to ensure its own long term growth and prosperity.

Long-time prominent China-basher Peteer Navarro made a sharp U-turn this week and has nothing but prose about China's stimulus package. He has a good analysis, follow this link:

China's "New Deal":
www.atimes.com/atimes/...

2008 Nov 13 11:46 AM

[dr.doolittle:]

when will China spend money to create something other than a medieval financial system? People talk of China as if it has become a modern society. I've lived their and while there certainly is an urbanization going on, the society is still for the most part feudal. Spending money on "infrastructure" makes for a nice headline. Using BMW's to haul grain from Xinjian to Beijing doesn't make much sense, though, nor will it work. Needless to say getting into "labor laws" in China is a rather interesting topic. I see the exact opposite of what the author is claiming because he is assuming this spending of highly valuable US Treasury securities to build roads and bridges purely for the thrill of driving in China provides any economic benefit to the Chinese whatsover. I could not disagree more. In the meantime the United States is taking equity stakes in banks as it's "bailout" strategy. By definition this is orienting the US taxpayer away from non-productive "Auto-bahns for the masses" and towards a substantial interest in successful capitalistic approaches towards managing a vibrant economy. Indeed, the approaches by the US and China, as well as Britain for that matter, could not be more different. It would appear market participants are recognizing this and are "voting with their wallet" by bidding up in rather extraodinary fashion the value of the dollar. I think Mr. Browne would be more instructive to his readers if he were to discuss the Russian invasion of the nation of Georgia and the continuing reverberations of that event. This collapse on Wall Street began on that day and the Russian and so called "world economy" has been reeling ever sense. The implications of this seemingly insignificant event is having massive reverberations and in ways no one could have predicted. Still, patterns are beginning to emerge and so are the winners and losers and I don't think one needs a Phd. to point whose winning and losing right now nor much to simply point it out. Unless of course you're one of the losers.

2008 Nov 13 01:02 PM

[waf76:]

dr doolittle,

Georgia invaded South Ossentia, Russia responded. This is common knowledge to informed society. I can't for the life of me understand how NATO has reached Eastern Europe. That's the real joke. It's a problem of our own making. However, Russian markets paid dearly for responding.

As far as China's stimulus package, how can one really compare it with America's? China has way more options than us. When you are leveraged to the tilt your options are limited. You dont go with the best option, you go with the least worst or the politically correct one. We would have been better off passing no bailout.

2008 Nov 13 02:36 PM

[Feng:]

"At last count the U.S. had a $14.3 trillion dollar economy. China has a $1.3 trillion dollar economy."

Where did you get that number? from 1990? In fact, the author's number is correct the GDP of China is roughly 1/5 of the US. It doesn't take any one much effort to check it out on google.

2008 Nov 13 07:19 PM

[Feng:]

I agree with canb888's comments.

Many people confuse a country's foreign reserve as the government's money. They are different things. China needs to pay $ or euro out (take in chinese yuan) from its foreign reserve when foreign investor wants to withdraw their investment, or domestic companies needs $ or euro to buy foreign goods.

Yes china's foreign reserve is heavily invested in US treasury. But China's fiscal stimulus package is not using the foreign reserve. there might be trickling down effect in the sense more domestic companies need $ to buy foreign goods due to the expansion, hence less reserve. But there is no direct relation on fiscal expansion and foreign reserve investment.

2008 Nov 13 07:25 PM

[canb888:]

My opinion posted yesterday is coroborated by this news today:
"BEIJING, Nov. 14 (UPI) -- China's 4-trillion yuan, or $586 billion, economic stimulus plan is to be partly funded by a 1 trillion yuan treasury bond issue, officials said...."
Link: www.upi.com/Business_N.../

On Nov 13 04:32 AM canb888 wrote:

> JIMHO, China
> will use cash surplus and issue local currency debt if needed to
> fund the stimulus and continue to hold huge amount of US Treasury
> papers.

2008 Nov 14 05:41 AM

[DonKenK:]

Sadly a very one sided analysis.
The US will remain the biggest buyer of China goods for a foreseeable future and China will remain an export economy for a foreseeable future despite their stimulus package.
It is therefore not in China’s interest to weaken the US economy nor the dollar by cashing out of US debts. Increased infrastructure spending in China will likewise benefit exports for US companies, such as GE, Caterpillar, ITT etc, another point ignored by the author.

2008 Nov 14 11:15 AM