China Announces Its Own Stimulus Package

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China is getting better at playing the spin game. Without mentioning to what extent the stimulus package represents additional spending above existing expenditure plans or specifically what projects the money is to be spent on the Chinese State Council announced Sunday evening that the country planned to spend US$586 billion over the next two years specifically to boost the economy. The New York Times reports the money is to cover a broad range of investments covering ten general areas including low income housing (which will do nothing to help an already depressed housing market) electricity, water, rural infrastructure and projects aimed at environmental protection and technological innovation ” a pretty broad swath and areas that were already high on the list for investment anyway.

In the past China has invested in the national road, rail and port infrastructure in times of need to keep domestic growth on track. By throwing out a big headline figure but keeping short on details the government is probably hoping for an injection of confidence to counter the current gloom. Toy, textile, shoe and even steel mills in southern China have been closing at a growing rate since the summer causing mass lay offs and sporadic unrest. Beijing is acutely aware that their mandate to govern (such as it is) rests on them being able to provide consistent and ongoing growth in the peoples’ standard of living.

Investment is not made directly by the government, it is directed via state banks and companies but there will undoubtedly be guidelines as to what constitutes an acceptable investment vs. what is not. The country already has an excess of production capacity in certain industries, notably steel and aluminum, and so investment is more likely to be in metal consuming projects than metal producing ” good news for the rest of the world’s producers.

Infrastructure projects are notoriously long term, even accelerating existing plans will take time. It will be interesting to see, despite the authorities short two year timescale, how soon any discernable change in demand results from this initiative. For the time being the effect is more likely to be in terms of lifting sentiment than an increase in hard consumption numbers.

–Stuart Burns

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