Tuesday, November 11, 2008


This week China finally got around to offering its beleaguered citizens some of the largesse stored up in the State Administration of Foreign Exchange (SAFE). It cobbled together a mammoth economic stimulus package valued at $586 billion. In typical Chinese fashion, details are scarce.

A few things seem clear:

• It’s no coincidence that the package was announced a week before the G-20 meeting next weekend. China now has a ringing answer to those who might argue that it is “not doing its part” to deal with the global contraction of demand.
• A substantial portion of the package consists of infrastructure spending on rail, roads and bridges. Much of this is aimed at the countryside. As such, it is not really new, as the latest five year plan had promised this sort of assistance of the forgotten half of China’s population.
• Some portion of the funds will be used for earthquake relief in Sichuan. Initially, the government lamely claimed that budgetary constraints limited the size of the relief effort. However belatedly, it will make some amends for that now.
• Another substantial chunk will go to rebuilding the social safety net. That’s long overdue in a country that has allowed ordinary citizens to lose access to health care and dribbles out pensions in de minimis sums.
• The package includes an unspecified amount of commercial lending, reducing the drain on SAFE’s strong box.
• In the current quarter, only $19 billion will be expended. The rest of the package will be spent over the following 24 months (an average of less than $24 billion per month).

We all should rejoice that China is finally attending to some of those left behind by the coastal boom. We should also be grateful that China sees the need to stimulate its own economic growth at a time when many economies around the world are contracting. No doubt that this bundle of measures is a helpful step for Chinese and non-Chinese alike.

But let’s question two contentions. First, how can the managing director of the IMF claim as he did that the stimulus package will produce a significant reduction in the global imbalances that imperil the global financial system? Even if every last dollar in the package were to come from China’s official reserves (and it seems clear that they won’t), the $586 billion would be more than offset by the continued current account surplus. Since the ersatz appreciation of the RMB began in July 2005, China’s reserves have increased – just the opposite of what would be expected – at an average monthly rate in excess of $30 billion. So, if everything else remains the same, the hole in official reserves caused by such a stimulus package would be fully replenished in about 19 months, faster than it is to be expended. At the end of 2010, China’s reserves would be about $200 billion higher than the $1.9 trillion that China acknowledges today.

Without a substantial and immediate revaluation of the RMB, the stimulus package can hardly be termed a major contribution to a more balanced international monetary system.

This leads to a second observation relating to this weekend’s G-20 meeting. On November 10, British Prime Minister Gordon Brown praised the “global power of nations working together” and urged the rejection of “beggar-thy-neighbor protectionism that has been a feature in transforming past crises into deep recession.” I’m not sure why Brown shied away from calling the Great Depression by its common name, but I do wonder what protectionist pressures he is afraid of. Who in the world is seeking at this time to raise tariffs, impose import quotas, or erect new non-tariff barriers? Even if some would like to do so, international rules prohibit them. What was bad policy in 1929 would be illegal in today’s trading system. We have legal protections against protectionism.

Invoking the protectionist bogeyman – there’s one under every bed, it seems – serves as a smokescreen for the real menace in today’s world – the modern form of mercantilism practiced by China and other countries. It’s the mercantilists who generate massive trade and current account imbalances. To make excuses for them, to hold them to a lower standard, to suspend the rules of simple arithmetic for them is the real threat to the global system.

Charles Blum

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