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China’s Stimulus Plan
Zhiyuan Cui
The School of Public Policy and Management
Tsinghua University
[email protected]
China’s $586 billion stimulus plan
and its 10 focus
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Picking up the pace of spending on low-cost housing—an urgent need in
many parts of the country.
Increased spending on rural infrastructure.
New railways, roads and airports.
Spending on health and education will be increased.
Environmental protection.
High technology.
Spending on rebuilding disaster areas, such as Sichuan province where
70,000 people were killed and millions left homeless by a massive
earthquake in May, will also be sped up. That includes $2.93 billion planned
for next year that will be moved up to the fourth quarter of this year.
Rural and urban incomes would be increased.
Credit limits for commercial banks will also be removed to channel more
lending to priority projects and rural development
reform of the value-added tax system will cut taxes by $17.5 billion for
enterprises, the statement said.
Value-added Tax (VAT) Reform
• A 150-billion-yuan tax cut formula under the Value-added
Tax (VAT) Reform has been submitted to the Chinese
State Council, and might come into effect on January 1
next year.
• The reform was aimed at shifting from a productionbased VAT regime to a consumption-based system,
which is practiced in most countries.
• Under the former regime, companies could not get
deductions on their tax bills for spending on machinery
and capital assets, while the latter system permitted
these expenses to be written off.
Greenspan for Nationalization
Former Federal Reserve chief Alan Greenspan says
the U.S. may have to nationalize some banks temporarily
to right the financial system and get credit flowing again,
arguing it’s the least bad option for policymakers. “It may
be necessary to temporarily nationalize some banks in
order to facilitate a swift and orderly restructuring,”
Greenspan told the Financial Times ahead of a speech to
the Economic Club of New York. “I understand that once
in a hundred years this is what you do.” Taking temporary
control of troubled banks through the FDIC or another
mechanism, he said, would “allow the government to
transfer toxic assets to a bad bank without the problem of
how to price them.”
“Chinese Savings helped Inflate
American Bubble”
New York Times, December 25, 2008:
“Others say the Federal Reserve and the Treasury Department
should have seen the Chinese lending for what it was: a giant stimulus
to the American economy, not unlike interest rate cuts by the Fed.
These critics say the Fed under Alan Greenspan contributed to the
creation of the housing bubble by leaving interest rates too low for too
long, even as Chinese investment further stoked an easy-money
economy. The Fed should have cut interest rates less in the middle of
this decade, they say, and started raising them sooner, to help reduce
speculation in real estate.
Today, with the wreckage around him, Mr. Bernanke said he
regretted that more was not done to regulate financial institutions and
mortgage providers, which might have prevented the flood of
investment, including that from China, from being so badly used. But
the Fed’s role in regulation is limited to banks. And stricter regulation
by itself would not have been enough, he insisted.
China: No.1 Holder of US Treasure
Bills (in billions of dollars)
Oct
Sep
Aug (2008)
China
652.9 587.0 542.4
Japan
585.5 573.2 586.0
UK
360.2 338.3 308.0
Carib
219.5 185.3 148.9
Oil Exp
187.7 182.1 180.6
http://www.treas.gov/tic/mfh.txt
China held $376 Billion Freddie and
Fannie Bonds
The top five foreign holders of Freddie and
Fannie long-term debt are China, Japan,
the Cayman Islands, Luxembourg, and
Belgium. In total foreign investors hold over
$1.3 trillion in these agency bonds,
according to the U.S. Treasury's most recent
"Report on Foreign Portfolio Holdings of
U.S. Securities."
Greenspan’s “conundrum”
between June 2004 and July 2006 the
Fed raised rates from 1% to 5.25% by
increments of 25 basis points in all 17
meetings. In his February/05 H-H
testimony before Congress Greenspan
used the term “conundrum” (Latin for
enigma) to describe the fact that long term
(including mortgage) rates had not
followed suit.
Martin Wolf’s Melbourne Lecture
2005
“ A large-scale flow of capital from poor countries
to the world’s richest nations is perverse. What
makes it even more perverse is that strong
political forces within the beneficiary country, the
United States, resent the generosity of their
creditors. Adding to this incendiary situation is
the likelihood that the suppliers of finance will
ultimately suffer large losses when the United
States is called upon to repay – or at least to
service – the capital it has received. Indeed,
many are already experiencing such losses as
the dollars tumbles.”
W.Max Corden
“Temporary Parking Theory of China’s
Current Account Surplus”
China’s Domestic Financial Institutional
Weakness leads to “temporary parking” of
saving abroad
China’s surplus plays only a small part in
determining the current global crisis
The Swan Diagram
James Meade
(1907-1995)
Swan Diagram (illustrating James
Meade’s 1951 Classic)
Krugman on “internal balance”: “relative costs
would tend to reduce exports, increase imports,
and thus reduce employment; to compensate, to
keep employment constant, the country would
need to have a fiscal stimulus – a larger budget
deficit. At any point to the right or below this
internal balance curve, the economy will suffer
from too much demand for its goods, and will
experience inflationary pressures”.
Swan Diagram (illustrating James
Meade’s 1951 Classic)
"external balance". It slopes downward,
because an increase in spending would
other things equal increase the current
account deficit; to offset this the relative
cost of production in this country would
have to fall. At any point below or to the
left of the external balance curve, the
country will have a current account surplus
(or at least a deficit below what is really
appropriate)
Krugman’s Rejection of
Devaluation
• How can relative costs be reduced? Well, the obvious,
textbook answer is a devaluation, which brings about an
immediate reduction in costs measured in terms of other
countries’ currencies. And five years ago many
economists – myself included – might have cheerfully
recommended a one-time devaluation, or a temporary
period of floating, as a way to get Brazil’s relative costs
into the right place. After all, Britain and Sweden did it in
1992, and nothing bad happened. Indeed, by any
measure the devaluing economies did better than the
hard-currency countries.
• But nobody who looks at the terrible experiences of
Mexico in 1995 or Thailand in 1997 can remain a
cheerful advocate of exchange rate flexibility.
Zhou Xiaochuan：Reforming the
International Monetary System
“Issuing countries of reserve currencies are constantly confronted
with the dilemma between achieving their domestic monetary policy
goals and meeting other countries' demand for reserve currencies.
On the one hand,the monetary authorities cannot simply focus on
domestic goals without carrying out their international
responsibilities��on the other hand,they cannot pursue different
domestic and international objectives at the same time. They may
either fail to adequately meet the demand of a growing global
economy for liquidity as they try to ease inflation pressures at home,
or create excess liquidity in the global markets by overly stimulating
domestic demand. The Triffin Dilemma, i.e., the issuing countries of
reserve currencies cannot maintain the value of the reserve
currencies while providing liquidity to the world, still exists”.
Zhou Xiaochuan：Reforming the
International Monetary System
“When a national currency is used in pricing primary commodities,
trade settlements and is adopted as a reserve currency globally,
efforts of the monetary authority issuing such a currency to address
its economic imbalances by adjusting exchange rate would be made
in vain, as its currency serves as a benchmark for many other
currencies. While benefiting from a widely accepted reserve
currency, the globalization also suffers from the flaws of such a
system. The frequency and increasing intensity of financial crises
following the collapse of the Bretton Woods system suggests the
costs of such a system to the world may have exceeded its benefits.
The price is becoming increasingly higher, not only for the users, but
also for the issuers of the reserve currencies. Although crisis may
not necessarily be an intended result of the issuing authorities, it is
an inevitable outcome of the institutional flaws”.
Zhou Xiaochuan：Reforming the
International Monetary System
“A super-sovereign reserve currency not only eliminates
the inherent risks of credit-based sovereign currency, but
also makes it possible to manage global liquidity. A
super-sovereign reserve currency managed by a global
institution could be used to both create and control the
global liquidity. And when a country's currency is no
longer used as the yardstick for global trade and as the
benchmark for other currencies, the exchange rate policy
of the country would be far more effective in adjusting
economic imbalances. This will significantly reduce the
risks of a future crisis and enhance crisis management
capability”