China’s Half-Trillion-Dollar+ Stimulus Package

We all knew this was coming. None of us knows whether it will work, and as I pointed out last week, there are some very different schools of thought on the topic. From today’s Times:

In a sweeping move at a time when major projects are being put off around the world, Beijing said it would spend an estimated $586 billion by 2010 on wide array of national infrastructure and social welfare projects, including constructing new railways, subways, airports and rebuilding communities devastated by an earthquake in southwest China in May.

The package, announced by the State Council Sunday evening, is the largest economic stimulus effort ever undertaken by the Chinese government and would amount to about 7 percent of the country’s gross domestic product during each of the next two years.

Beijing also said it was loosening credit and encouraging lending as part of a more “pro-active fiscal policy.”

“Over the past two months, the global financial crisis has been intensifying daily,” the State Council said in its statement. “In expanding investment, we must be fast and heavy-handed.”

The stimulus plan would be enormous for any country, let alone one whose gross domestic product is lower than most other major industrialized countries, at around $3.5 trillion this year. Earlier this year, the United States Congress passed a $700 billion bailout package in a country with an economy whose size is close to $14 trillion.

One prominent American blogger looks with envy at China’s ability to pony up such a staggering sum and laments America’s inability to fill its own coffers to handle emergencies like this and mostly blames Bush, which isn’t that simplistic considering we were in the black when he took office.

During boom times, China amassed budget surpluses and built up reserves. Now, during a downturn, they’re able to respond with a huge spending initiative at a time when (a) such spending is needed to keep the economy going, and (b) the downturn makes it cheaper than it would otherwise be to complete such projects….Bush took the situation and decided on a combination of irresponsible tax cuts for the Americans who needed them least, an enormously expensive new war whose massive costs involved little if any productive investment for the future, and homeland security spending much of which (like complicated-yet-pointless enhanced airport security) mostly serves as a minor drag on economic activity.

Please note this isn’t to blame only Bush for the financial collapse itself – only for bankrupting the Treasury before the crisis even hit and making a China-like solution far more difficult.

On the other side of the coin, a prominent Chinese blogger who blogs in Chinese sent me his thoughts on China’s stimulus package via email. A fascinating perspective:

I do NOT think those infrastructure investment from Chinese govnerment is the solution to the coming Great Depression. The reason is very simple: if common Chinese people still are reluctant to make consumption instead of save money in the future, every policy stimulus is useless. The only effective way to fight the crisis is to make the poor have more money to spend, but this is the last thing Chinese government will do.

Actually, I hope the crisis will bring us a revolution.

Well. That sure opens up a barrel of questions.

As I said in my earlier post, if this crisis really hits China as hard as some of my readers believe, and if the government handles the stimulus package as dreadfully as it’s handled some other crises, revolution, however unlikely, is not inconceivable. The consensus in the earlier thread was that revolution was not in the cards, as the CCP has already demonstrated its willingness to send in the tanks.

I can’t go quite as far as my fellow blogger and hope for revolution. I hope for more money and opportunity to reach the huddled masses without a revolution that could leave everybody worse off. (If someone could answer the question of who would fill the power vacuum I might be persuaded to hope for it.) Maybe the realization that revoltuon is even possible will shake the Party into a realization that two vastly separated nations, Rich China and Poor China, is not a sustainable model, and that it’s time for some serious, intelligent wealth-spreading.

Pass the popcorn and watch the global drama unfold.

Update: I am happy to see that my fellow blogger has put up his own post in Chinese about our email conversation. You can see it here. I truly admire his courage, not to mention his intelligence.

The Discussion: 36 Comments

it ain’t just bush, blame it on BOTH parties, they are both corrupt!!!!!wait til obama starts handing out MORE welfare, the $$$ woes are only going to get worse when more mexicans pour accross the border….

November 10, 2008 @ 10:18 am | Comment

That’s why I said we can’t blame Bush alone for the meltdown. We can definitely blame him for bankrupting the treasury with his small-government, no foreign-intervetion model. “Heh.”

Obama can’t put Humpty Dumpty together again in one month or one year – it will be a long painful process. Give him a chance, then start calling him names if it makes you feel better.

November 10, 2008 @ 10:26 am | Comment

the coming Great Depression? Revolution? I’m sorry, the sky is not falling, the world is not coming to an end. Yes, the economy is facing rough times that are only going to get rougher, but what your friend is talking about is an absolute meltdown and China is nowhere even remotely near that point. Further, the government has done a very good job handling economic matters, including the ’97 Asian crisis. The government has yet to botch (or “handle dreadfully”) a major economic issue and I have confidence the government won’t, because it knows the costs if things go wrong. I hope I am not made to eat my words, but revolution? I can only laugh at anyone who thinks that could happen due to the current (and upcoming) economic climate.

November 10, 2008 @ 11:02 am | Comment

B. Cheng, I dunno – I’ve always maintained that China would be significantly less affected by the meltdown than the West. But others disagree. I’m just comparing arguments. Of course, it’s all speculation anyway, but I’m fascinated at how different people see the same circumstances and come to very different conclusions. In the earlier threads I gave China credit for the 1997 stimulus package. This time it’s a bigger, deeper, cross-border situation so the party’s economic savvy will be tested to its limits. I said I thought they’d come out okay, certainly compared to my own country, but no one knows. We’re all kind of feeling our way through the darkness.The world has never seen a situation like this, where the global economy seems to be a house of cards.

November 10, 2008 @ 11:10 am | Comment

Interesting takes, Richard. I do not believe your blogger friend is right. The pool of savings that Chinese consumers have will help drive more investment — banks, after all, have to lend out money to make money — and is directly related to the national growth rate. The high savings rates also underpin the government’s ability to borrow/print/spend money to stimulate the economy. Your blogger friend is thinking like an American where a mature economy is driven by consumer expenditure, but in a developing economy, consumer expenditure is generally relatively less important. That kind of economy is driven more by investment, whether in infrastructure from gov’t or new production facilities by private firms.

Thus for me the real effect of the stimulus will depend on WHERE it is applied. Infrastructure spending can have strong effects in lower income, rural, etc areas where incomes get a strong boost from multiplier effects on local businesses, second incomes from extra work on projects, etc. And of course what it is spent on. If they just randomly spray concrete around the countryside like we do in Taiwan, it won’t have much effect. But if it goes for dams and highways and ports, etc….

November 10, 2008 @ 11:28 am | Comment

Michael, I am with you. It will be intriguing to see where this money goes.

November 10, 2008 @ 11:31 am | Comment

I think that the majority of Chinese will be affected by the global financial crisis like the Amish in America.

November 10, 2008 @ 12:20 pm | Comment

The stimulus package does not just boost spending in infrastructure construction, contrary to what your friend blogger said. If you read the official agenda, it includes wide range of new fiscal policies.

1. Reform and improve the existing medical system. I believe this area is the hardest to spend your money right.

2. Social security, especially for the elderly. This should take the burden off the young people and give them more budgets to spend on other stuff.

3. Value added tax break for companies that are upgrading to higher tier/tech. Encourage companies to implement new model for growth, such as branding and reach out to the domestic market, instead of one that is driven by export.

4. Expand cheap housing for lower income families.

5. Increase spending utility infrastructure in rural area, running water, electricity, sewer system, etc.

6. Increase spending on railroad, highway, airport and other large scale infrastructure.

7. Invest in the environment. Such as improving and expanding waste water processing, waste management, forest preservation, and encourage research in energy efficiency technology.

8. Speed up the reconstruction in the Sichuan quake zone. More funds will be allocated for reconstruction on top of the existing funds that is already there.

9. Increase income in county and village level. That means subsidizing the farmer and take measure to raise the price floor for various crops.

10. Remove the certain limitation on the bank credit system. Bank can give credit to organization/project that previously would not be considered. Bank can also give credit to individual for consumption in goods other than real estate.

The reason they were able to pass a package this size, nearly 16% of last years GDP, is the same reason Bush can rally congress to back him after 9/11 to invade Iraq. They have been saving for a long time, and now is the best time to spend because of the falling commodity price. It also give them advantage in negotiation when employ foreign services.

In business, there is a famous saying “Your success are not measured by how well you do in good time, but by how well you survive during time of crisis. If you survive the crisis and be the last man standing, you will be king.”

November 10, 2008 @ 12:46 pm | Comment

Thanks Fob, especially for the last two paragraphs which are spot-on. I’ve always said China had yet to meet its moment of truth. That moment has arrived.

I think Yifeng is skeptical about whether any of the money will actually reach those at the very bottom – i.e., the majority. The itemized list is wonderful on paper. Can it be adhered to without more and more money going to party mistresses and Pajero SUVs as it moves down the food chain? That’s a big question.

November 10, 2008 @ 1:02 pm | Comment

These projects seems to be stuff that has been on the shelves that hasn’t gone through because of overheating economy and high material cost etc. Now they can just dust off these project and put them to work.

November 10, 2008 @ 1:26 pm | Comment

Also I think the whole “China will stay mostly reactive” notion has been proven wrong at least for now. I doubt US will see a major stimulus package this fast. At least until the new Congress has taken their seats next year (with some senate race still unresolved), nothing is going to get done with this lame duck congress and lame duck president.

November 10, 2008 @ 1:30 pm | Comment

China has done the right thing with the huge stimulus package. It is better to be too bold than too timid during a financial crisis and potential depression.

I think US would need to do a huge stimulus package itself. It would have been better if the US had budget surpluses during times of plenty. But now is not the time to worry about balancing the budget. Spend heavily, and target it so that it produces domestic jobs. I suspect the budget deficit would pass 1 trillion next year.

November 10, 2008 @ 2:12 pm | Comment

As previously stated on similar topics, I agree with your friend’s estimation of the efficacy of public works projects. I certainly hope that fobtacular is correct that the Chinese government will also use this money to invest in social services.

Public works projects will not encourage an across the board increase in consumer spending which is what China ultimately needs. They will help absorb unemployment temporarily, but in the end the big winners will be 1. the government, who will have another set set of toll road, subways, etc. that they can collect on. 2. The contractors that build these things. The laborers who build them will still receive the same crummy wages they receive now, and
therefore won’t have any incentive to spend anymore than they already do. Plus, these type of projects are just ripe for corruption at every level, only exacerbating an already destructive issue.

Social services will at least take some of the load off consumers, so even if their wages are stagnant they are finding more money in their pockets. Here’s hoping that the Chinese government is MORE aggressive in pursuing this route, instead of simply relying on the what I see as ultimately “trickle down” philosophy of infrastructure development.

In sum, they need both, but in my opinion social services is the better investment over the long term. And no there won’t be revolution no matter how they decide to use the money.

November 10, 2008 @ 2:13 pm | Comment

Richard, your blogger friend is a moron. Definately your friend is a pro-west moron. His judgment is based on imagination instead of truth. Westerners may like him, but still he is a moron.

November 10, 2008 @ 2:30 pm | Comment


I think we all know who the moron is here…

November 10, 2008 @ 2:58 pm | Comment

@ AndyR

It is consensus among all netizen that to encourage people to spend any money, four major issues need to be sorted out first. Those issues are healthcare, housing, education, and elderly care for their retiree parents.

Notice that only point 5 and 6 on the listed policies involves accelerating infrastructure investment, the rest of them directly or indirectly tries to address those 4 issues I mentioned. It just shows that the government is leaning toward heavy expenditure in social service area.

The important question is, like Richard said, if they can adhere to what they proposed. To answer this question, ask yourself “are CCP motivated enough to carry out those policies? What would happen to CCP’s political legitimacy if they fail to carry out those policies? I mean what is at stake here?” As for how much of this money would end up in corrupted official, it would be accounted as a cost. If 25%, could be higher, of the 4 trillion RMB is siphoned off by corruption, 3 trillion RMB will still be able to go to where it is intended. This is the same approach they took when battling against non-performing loan made by the bank by letting the real economy out grew the bank’s loss. Corruption is an issue that will be accounted for, but right now the pressing issue is financial crisis.

November 10, 2008 @ 3:07 pm | Comment

Many of the financial rags in Europe, the US and even HK are saying that this plan does not disseminate between how much of this big outlay was already budgeted and how much is from the forex reserves.

Also keep in mind that China did not just warehouse huge stacks of foreign bills, they invested billions in Bear Stearns and 20% of the forex reserves on AIG corporate paper. And we know what happened to those companies.

And given China’s fiscally conservativism, there must be something afoul to prompt them to drop this big pile of money into the domestic economy as well as restarting VAT refunds and other export subsidies.

November 10, 2008 @ 3:20 pm | Comment

May, did you read his website? I wouldn’t be calling anyone a moron were I you.

November 10, 2008 @ 4:09 pm | Comment


As I said before, I hope you are right. Unfortunately, I lack confidence in what will ultimately be done despite the bullet points. I think that the government is filled with “engineers” who like to concentrate on infrastructure over social programs, despite the political legitimacy issues. The China we have now is a result of this lack of attention. Anyway, it seems like they have the right idea, but as both you and Richard say, we have to wait and see how they once again put theory into practice.

November 10, 2008 @ 4:22 pm | Comment


It’s interesting that you bring up the fact of a “consensus among netizens”. Do you think that this ultimately has any affect on policy? Are we looking at a sort of pseudo-democracy at work here via the web?

November 10, 2008 @ 4:24 pm | Comment

I’m glad you raise the point AndyR, I was watching the thread waiting for someone else to bring it.

The way I’ve been understanding the news recently, before and after the announcement, it appeared to me that the emphasis would actually be put on infrastructures at the top and then going down the list. Haven’t seen any headlines such as: The country number one priority is to reform the medical system.

What fobtacular said seems more like a wish list than the actual agenda. Although I might be wrong, because he mentioned that it’s stated in the official agenda.

Which brings me to this question, where can we read it actually? Could you please point me to these sources (not being ironic here, real question)?

November 10, 2008 @ 4:39 pm | Comment

“And given China’s fiscally conservativism, there must be something afoul to prompt them to drop this big pile of money into the domestic economy as well as restarting VAT refunds and other export subsidies.”

Conspiracy theory already? How about simply running rational fiscal policy? Been fiscally conservative means you are saving for rainny days. And this is rainny days, nothing wierd or contradictory here.

And who cares if money’s from forex reserve or not. China doesn’t have to physically go to a bank to change their forex into cash, they simply issue more bonds because they have low debt.

November 10, 2008 @ 5:00 pm | Comment

“And given China’s fiscally conservativism, there must be something afoul to prompt them to drop this big pile of money into the domestic economy as well as restarting VAT refunds and other export subsidies.”

That we could translate to Panic Mode With Chinese Characteristics.

November 10, 2008 @ 5:06 pm | Comment

But still not clear is how this effects Rmb/ US$? – practically how will they channel the money? Do they have to sell some the FX reserve?, or will they allow the domestuc banks to borrow more from the Central Bank – and then out all in Rmb ? Hiow quikly will this start to have an effect? – Months, or quarters?, will iron ore prices begin to recover – when ?

November 10, 2008 @ 6:51 pm | Comment

I didn’t read the whole $^&% thread, but did anybody point out that this is not all NEW stimulus? Most of it consists of projects that were already planned and announced. Actual new money is actually relatively small. In other words, it’s a bit of typical window-dressing.

November 10, 2008 @ 6:52 pm | Comment

Actual new money is actually relatively small. In other words, it’s a bit of typical window-dressing.

Out of curiosity, how did you work that out? If true it looks like a way to try to get the stock market going again, though it would be rather stupid because it will fall back when people realise that.

November 10, 2008 @ 8:47 pm | Comment

Raj; thru a reasonably respectable organization.
Don’t forget, when reading China news, 2=5. And down generally means up with Chinese characteristics.

November 10, 2008 @ 8:55 pm | Comment

Hallelujah for Sam S, it took 25 comments for the little boy to point out the emperor is wearing no clothes. Are these new initiatives? In most cases not. Is this new spending? In most cases not, it is existing separate projects gathered together and packaged as a ‘big stimulus’.
The Hu/Wen government have been talking about more funds for rural dwellers for years. The Hu/Wen government have been talking about new healthcare for years. The Hu/Wen government have been talking about a genuine social safety net for years.

They can’t get traction on it because vested interests in the Party and State and red hat capitalists won’t have a bar of it.

November 10, 2008 @ 9:44 pm | Comment

Sam, thanks for that. I thought there was something fishy with all of this but couldn’t quite put my finger on it.

November 10, 2008 @ 9:57 pm | Comment

One of the first article I’ve seen that seem to finally underscore the nonsense that some “specialists” have been advocating in the recent weeks.

“The Chinese are savers, not spenders, distribution is lacking and the country’s vast hinterland is cut off from the global consumer economy.”

“The spending binge on infrastructure is a belated attempt to kickstart consumption and ward off an export manufacturing collapse. Wishful thinkers who touted the notion that China was somehow decoupled from the West were ignoring the telltale signs of pain in the slowing of the trans-Pacific container trade and the sputtering Chinese plants.”

We should never underestimate the power of the Butterfly Effect. And the Butterfly just flapped is wings violently.

November 10, 2008 @ 10:47 pm | Comment

Nah, The article cited by Sam overlooked several issues: some expenditures have been announced previously but the magnitude is higher in this package, I.E they used to talk about a 800 billion over 3 years reconstruction projects in earthquake regions, now it is 1 trillion over 2 years. This is the same for many other initiatives, they had been talked before. This time Beijing really put money on them.

I would say that the policies seem to be right. The only question is how they implement them.

November 10, 2008 @ 10:57 pm | Comment

Nah, The article cited by Sam overlooked several issues: some expenditures have been announced previously but the magnitude is higher in this package

I thought that the article said quite clearly that only some of the money announced had already been pledged – i.e. that it is not ALL new.

November 11, 2008 @ 12:37 am | Comment

It’s not surprising that it’s not all new. For any given big project, it could be in the talk for years, if not decades. Under the stimulus plan, they might expedite the approval process and move more swiftly. The whole package ($568 Billion) amounts to about 1/7 of the total size of the economy. It’s quite a robust one. What’s in the news now is that Premier Wen summons all provincial governors for an emergent meeting to give instructions regarding how to implement the plan. Wen emphasizes that this plan must be implemented in a swift, accurate, and heavy-headed manner. I can’t help comparing the Chinese plan with American one. $700 billion is lot smaller given that U.S. economy is about 4 times larger than the Chinese economy. Plus this American plan is fully aimed at financial system whereas the Chinese plan is very comprehensive. I believe with the Obama administration moving in, the total stimulus package could be doubled or tripled, and it will get comprehensive, too. This is actually the right time for the government to run a large deficit, and spend heavily.

November 11, 2008 @ 4:29 pm | Comment

As long as the money doesn’t go to the US bonds and financial blackhole, it wil at least do some good. The biggest worry I had before this stimulus package was announced was that China, under the pressure and convincement of US and Europe, took the route to invest MORE to the US financial blackhole by buying up troublesome US financial institutions (once a life time opportunity! value buying! take leadership on this financial crisis!). With this new stimulus package announced and supposedly will be implemented in two years time, it is at least gotten rid of this pressure and assure the Chinese society that the Chinese government is clear about the situation and is not hot-headed.


Richard said,

Michael, I am with you. It will be intriguing to see where this money goes.

November 13, 2008 @ 4:03 pm | Comment

If anyone is interested…NPR on China’s “stimulus package”

The recording will be posted tomorrow morning for anyone whose located in China.

November 13, 2008 @ 11:14 pm | Comment

Hope is universal, whether the region be China, Canada, or the United States. The ideal stimuls package would instill hope, and the hope would be based on realistic outcomes. I like any perspective on the economic crisis that introduces an element of hope. As a psychologist, my take on this phenomenon is that it is psychological, based on fear.

The loss of the economy, as we knew it prior to this recent crash, involves a grieving process that I believe will culminate with recovery.

The catalyst for that recovery is hope.

January 15, 2009 @ 10:04 am | Comment

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