China’s fiscal shock and awe

On Sunday, China announced a humongous 4 trillion yuan ($586 billion) economic stimulus package to bolster its slowing economy, but many are already questioning how effective the plan will be, both for China and for the world.

The package, which includes spending on low-cost housing and infrastructure projects and new tax deductions for companies, comes at a cost equivalent to 15 percent of China’s current GDP. (For comparison, the U.S. Treasury Department’s $700 billion bailout plan is about 5 percent of U.S. GDP.)

Analysts have since pointed out, however, that not all of the spending is new. For instance, the 4 trillion yuan price tag includes funds already allocated for rebuilding after this year’s earthquakes in southwestern China. Moreover, the funds will be disbursed over the next two years. Given the lag time between undertaking new projects and realizing their economic benefits, this may not be swift enough to prevent GDP growth from dipping below 8 percent — which some analysts says is the minimum growth rate needed to absorb the millions of rural workers entering the work force. Slower growth could cause unrest and undermine the Communist Party’s control.

Even if China’s stimulus package does manage to lift the Chinese economy, will that benefit the United States? Some machinery manufacturers may be relieved to find new sales in China and oil companies may be pleased to see Chinese demand propping up oil prices, but much of China’s spending will probably go toward procuring raw materials from developing countries for projects such as highways and airports. Given that consumer spending accounts for more than two thirds of U.S. economic activity, Chinese infrastructure spending is unlikely to get the American growth machine going again.

The most magnanimous gesture China could make would be to invest a portion of its estimated $1.9 trillion in U.S. currency reserves back into the United States, perhaps to spur its own badly needed round of infrastructure spending. That’s one gift it’d be nice to see under the Christmas tree this year, but the chances seem pretty slim. It looks like Americans will have to rely on their own lawmakers for that shot in the arm.

Photo: MARK RALSTON/AFP/Getty Images