Captivating contrast in stimulus spending in China and USA

China and USA provide contrasting stimulus packages successfully unravelling with flavours of their own. These spending ploys seemingly taken from the Keynesian playbook have given more than a bang for their bucks. A recent buying spree in USA resulted in 470,000 cars being sold as detailed below.

China’s massive infrastructure spending was equally spectacular, the planned 50 billion dollar Beijing-Shanghai’s high-speed train project, for example, was a just a spec of Chinese ingenuity.

In China the steady return for their infrastructure growth has exceeded all expectations. The major multi-purpose projects included among many others a gas pipeline from the Northwestern Ningxia Hui Autonomous Region to the Southern economic hubs of Guangzhou and Hong Kong, at an investment of 93 billion Yuan, the building of the Guangdong Yangjiang nuclear power plant. The list is several pages long.

The estimated stimulus package worth four trillion Yuan or 570 billion US dollars, about 13 percent of its GDP became a reality as the recession began to assert itself. Programs announced in 10 major areas, included affordable housing, rural infrastructure, water, electricity, transport, the environment, technological innovation and rebuilding after disasters like the May 12 earthquake.

Most noteworthy is the absence of a disconnect between its financial hierarchy and ordinary people. China hasn’t allowed its banking sector to become so powerful, so influential and so big that it can call the shots or highjack the bailout. Chinese banks are lending to the people and their businesses in record numbers.

Shanghai Stock Exchange. Pic.courtesy: Google

Two major constrains in stimulus ‘bubble’ are massive liquidity leading to prices spiralling up and the stocks getting over valued. New loans in China rose unexpectedly during the month of August to 410.4 billion Yuan. China’s total money supply called M2 rose by 28.5 percent in August compared with the previous rise by 28.4 percent. Liquidity is being watched to prevent prices rising.

China’s stocks index also rose that might induce foreign demand on the Chinese stocks, as the outlook of several sectors started to improve. Stock value had shown a rising trend so far. It was the over-valued stock market and banking impropriety that caused the financial meltdown in the US last year.

Jobs secured

China’s Prime Minister Wen Jiabao, indicated recently that the Government was able to keep the job market steady with employment opportunities keeping to near optimum level, thereby helping to douse latent social instability. China used exports rebates in boosting domestic demand and offsetting slowing exports. Export rebates on more than 3,700 items - mainly labour-intensive, mechanical and electrical products and other items vulnerable to weakening overseas demand was also raised.

The most irrefutably imprint of China’s rise to the top of the international pyramid is the ability amass foreign reserves.

It has accumulated so much in the way of dollar reserves that it would be very difficult for speculators to do the same thing to the Chinese stock market that the powerful stockholders did in the States.

China can handle a gradual stock market decline due to any natural market forces unlike the catastrophic meltdown of the Wall Street last year.

China’s economy today provided a framework that effectively encourages entrepreneurs. Some boldly predicted that China seemed bent on creating the world’s dominant capitalist economy. It would not be runaway mega enterprises built on speculation and unmitigated profiteering. The Chinese experience would be the subject of study for years to come.

US Government intervention

The US stimulus package estimated in trillions of dollars executed (exact amount still being tallied) was unprecedented due to its size and shape. Governmental intervention in the financial sector became inconceivably colossal - another first for US. Job creation so far is nearing 200,000 as close to $ 300 billion had been pumped into the economy. It will treble during the next six months as cities and States get the full share of their stimulus money from the federal government.

The economy had to face a reversal of ‘consumer psyche’ caused by the collapse of financial system and a steep drop in housing values. All told, the Central Bank (Federal Reserve) went into top gear pumping as much as an extra $1.15 trillion into the economy via bond purchases, Treasury Bills and purchases of mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac, the largest housing lenders.

The drop in the net worth of an American Household was stupendous - between 2003 and 2007 - prime years of the US housing boom - the average household had expanded to about $540,000, from about $400,000, according to an analysis of US federal data. It reversed and by the first three months of this year, household net worth had dropped to $421,000. When you consider that a homeowner can borrow up to 90 percent of its total value. That was a major calamity to many.

Cars for clunkers

So the “cars for clunkers introduced in August was a god-send to businesses. An induced buying spree which gave $3,500 to $4,500 to each car buyer exchanging a second-hand car for a fuel-efficient new car caused people to open their purses and go for a new car.

All cars surrendered had to be newer than 1984 models and with lower than 18 miles per mile in gas consumption. All new cars had to be over 20 miles per gallon in gas consumption.

The Obama administration ended the program after expending $ three billion the Congress voted for it. On an average, a consumer parted with $15,000 to 20-000 for a new car but got a fat $3,500 to $ 4,000 reduction in price. The car dealers were reimbursed for the reduction in price for each of the cars sold. The ruse worked as the price cut attracted nearly 500,000 buyers spending over S 8 billion of their money. That was nearly thrice the stimulus spent by the government.

Fueled by the exuberant car buying, things changed. The downturn is still far from being over as incomes did not rise and the rosy picture of a booming economy did not come over night. But the downgraded expectations that clouded the usual rosy assumptions about the future and eroding the impulse to buy changed causing consumer demand to rise gradually.

Rudimentary capitalism shows signs of growth in China, while USA now has the largest public sector in its history. We will hear about them for years. This would become happy hunting grounds for PhD seekers, you can bet on it. The contrast is the most spectacular happening in thus decade.