Monday, November 10, 2008

China's massive stimulus package!

About as big as Australia's GDP

Craig James at CommSec:

China’s massive economic stimulus plan

China’s State Council has announced a massive stimulus package. The package, estimated at 4 trillion yuan or almost A$900 billion, represents 86 per cent of Australia’s annual GDP.

China’s State Council said that the money will be spent over the next two years covering 10 areas including “low-income housing, rural infrastructure, water, electricity, transportation, the environment, technological innovation and rebuilding from several disasters, most notably the May 12 earthquake.” Total investment of 400 billion yuan is expected in the fourth quarter of 2008.

China has also announced that it will ease credit conditions. The official Zinhua government news agency said “Commercial banks' credit ceilings will be abolished to channel more lending to priority projects, rural areas, smaller enterprises, technical innovation and industrial rationalization through mergers and acquisitions. “Zinhua also noted that taxes will be cut including “a comprehensive reform in value-added taxes, which would cut industry costs by 120 billion yuan.”...

Zinhua also reported the following from last weekend’s meeting of the State Council: “The meeting also announced that China will adopt "active" fiscal and "moderately active" monetary policies and map out more forceful measures to expand domestic demand, speed up the construction of public facilities and improve living standards of the poor to achieve "steady and relative fast" economic growth.”

“The macro-economic policy changes announced on Sunday are one of only a few major shifts during the 30 years since the beginning of reform and opening up in 1978.".

What does it all mean? 

The old adage is that when the US sneezes, Australia catches cold. And while that proved right up to the 1990s, it certainly hasn’t held since. The global economy went into recession in 2001, dragged down by the US, but Australia didn’t follow. Australia is far more dependent on Asian economies, such as China, countries regarded by the IMF as in better shape to ride out the global slowdown.

The massive stimulus package announced by China represents great news not just for the Australian economy but the global economy. Not only is infrastructure spending being lifted, but monetary policy is being eased, showing that China is not taking the global slowdown lying down. China and India were already set to drive the global economy over 2009 and the news of the huge stimulus package highlights just how important the Chinese economy has become.

While Australia is less directly affected by slowdowns in the US and Europe, it still remains vulnerable to knock-on effects and sentiment. Less demand for Chinese goods in the US and Europe means less demand for raw materials in Australia. And while the Australian economy remains fundamentally solid, consumers and businesses are affected by gloomy media reports and can over-react by pre-emptively cutting spending, employment and investment.

The most resilient economy

Each year, the Institute of Management Development in Switzerland assesses the resilience of countries to economic cycles. Australia has taken top spot in six of the last seven years and again was number 1 in 2008.

Australia (6.78) was ranked ahead of Denmark (6.73) and Switzerland (6.43) and these three countries finished well ahead of next-placed Israel (6.14) and Austria (6.00).
While a number of factors are involved in calculating an economy’s resilience to external shocks (and overall competitiveness), Australia’s low reliance on exports certainly provides insulation to the economy.

In Australia, exports account for just over 20 per cent of GDP, well below the world average of 33 per cent. Importantly, while dependence on exports has generally increased across the globe over the past 20 years, the lift has been far more modest in Australia.

Changing trade relationships

In September 2008 alone, Australia exported $3.3 billion of goods to China and $1.8 billion to India but just under $1 billion to the US. The data highlights the fast evolving trade relationships between Australia and the rest of the world.

In the year to September, the share of Australian exports to the US fell to a record low of just 5.7 percent, around a third of the 15.4 per cent share held by China.

Even India has now passed the US in terms of Australia’s top export destinations. Just four years ago exports to India were half the size of shipments destined for the US.

China is Australia’s largest trading partner and its importance continues to grow.

China passed the US to take second spot in February 2005 and it then passed Japan in July 2007.