It is only two weeks ago that I was discussing with my friend Bala about the global implications of a slowdown in the Chinese economy and what the Chinese government could do to prevent a sharp slowdown. We agreed that the Chinese government would, as a last resort, deploy its massive reserves to build assets and keep the growth rate from collapsing. I had also argued in my previous post that the Chinese authorities are unlikely to allow the growth rate to drop below 9 to 10 percent, to avoid the risk of their political system becoming unstable.
We could not have been more prescient. The Chinese government has now declared a huge stimulus plan worth nearly USD 600 billion over the next 2 to 3 years on infrastructure build up. As always with China, there is not much information available on how the stimulus package will work and what part of it is in addition to the projects announced already.
There is no doubt that such a massive capex plan will ensure that demand in many basic industries do not fall off a cliff. However, one needs to guard against the build-up of non-productive assets, for which China is well-known.
The stock markets greeted the move with a big rally, but it will not be long before the rally peters out!
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i just had a thought. FDR did a "new deal" and jumped into the keynesian band wagon, because 1)he was a politician who wanted to get reelected in four years time 2) he actually cared for the american people.
Now,compare this to the Chinese politburo - 1)they dont do elections in china 2)do they actually care how Chinese people live?. these are the dudes who build potemkin republics for a couple of weeks of olympics.
A chinese "new deal" would be heavily skewed toward keeping the cheap exports machine ticking and not toward building up internal infrastructure. all the while, the markets for cheap crap is dying out and the target countries are growing more and more protective.
Only thing funnier than being ruled by libertarians is being ruled by communists. ;-)
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