George S. May Business Blog

China announces its own stimulus plan; what impact will it have both domestically and internationally?

China is set to unveil a new stimulus package tomorrow. So I ask, will this boost the Chinese economy, and furthermore, will China now be poised to lead the rest of the world out of recession?

I heard an economist speaking this morning who basically made the analogy that if China were a company, it would have the best balance sheet in comparison to the rest of the world. His argument was basically that China can spend a lot of money on a fiscal stimulus and unlike the US it won’t have to engage in heavy deficit spending and thereby crowd out its own private investment. So, in effect, China has a great opportunity to restructure its own economy. Remember, only one-third of its GDP is driven by consumption, as opposed to the US’ two-thirds. Then again, that above number is part of the problem.

Essentially, what China’s government is trying to do with this stimulus is spark spending within. This does not come as a surprise to many as A) the Chinese rely VERY heavily on exports (that’s why when the US has a recession, effectively, so does China), and B) well, let’s just be honest, the Chinese are, and have been, notorious for over-saving and under-spending.

Now, before I continue I want to remind that China doesn’t have the health care and pension programs that many other countries do. Has anybody ever thought that may be the reason they “over-save”? Not because they are stingy, so to speak, but because they want to be able to eat and get the medial attention the need when they grow old.

So, to answer the first question, will this stimulus boost the Chinese economy? Yes, but its staying power, in my opinion, will rely upon provisions, or a lack thereof, within that stimulus being handed out. If China uses their fiscal stimulus not just to build infrastructure, but puts that money toward building up its health care and pension system, the Chinese citizens will be less worried about he future and spend more now. The bottom line is, without that safety net, consumers are going to continue to save, stimulus or not.

Now, will it lead other countries out of the recession?

Well, if China uses the fiscal stimulus to build up its own domestic demand, I say it will definitely give a boost to Japan, Taiwan, South Korea and other neighboring Asian countries. But, in terms of the US, well, this stimulus may prove to actually have a negative effect. Think about it this way, if China starts financing a lot of the fiscal stimulus there, they may not buy bonds in the US, sparking a hike in the interest rates here.

With all that being said, it should be noted that just the news of the Chinese stimulus has sparked some really positive reaction on Wall Street. The S&P is up 12 points, NASDAQ is up 28 and the Dow is up 118 the last time I checked.

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