China's Spending May Thwart Olympic Curse
Bloomberg has a great article this morning on the much talked about Chinese plan to stimulate its economy, including tax cuts and increased spending on infrastructure. China's government is in the process of approving a stimulus package of as much as 400 billion yuan ($58 billion), consisting of 220 billion yuan in spending and 150 billion yuan in tax cuts.
China certainly has enough money to fund economic stimulus. Its debt represents only 15.7% of the country's GDP, compared to a massive 75% in India, it has a budget surplus (what is that ;)?), and it is sitting on the world's largest currency reserves, at $1.8 trillion.
It has already tripled its spending on railroads this year to 300 billion yuan. Its existing five-year plan (through 2010) earmarks nearly 4.8 trillion yuan for power stations, waterways, roads and other infrastructure projects. Rebuilding after the country's recent tragic earthquakes could add another 1 trillion yuan in spending to this.
In addition to this fiscal stimulus, China may consider "taking its foot off of the brake" and easing monetary policy as well. The recent drop in inflation there, from 8.7% in February to 6.3% in July, will boost the case for the government to lower banks' reserve retirements to put even more money back to work.
While it has been trendy to call for the demise of China and a massive slowdown there lately, I still personally feel that the rumors of its demise have been greatly exaggerated (to butcher a Mark Twain quote). If this is the case, as I have predicted the Chinese stock market will outperform the U.S. market and increasing demand for commodities from China will eventually put a floor under the rapidly falling price of oil.
China's Spending May Thwart Olympic Curse, Buoy Asia