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China’s Stimulus Package Aims to Boost Economy, Help Avoid Global Recession

November 10, 2008 at 6:25 PM EDT
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Asian and European stocks rose Monday on news of China's $586 billion stimulus plan that aims to restore investors' confidence and shore up markets over the next two years, while sending a message of resolve and financial stability to foreign governments. An economist discusses the plan's implications for China and the world.

MARGARET WARNER: Faced with its own economic slowdown, China announced yesterday a stimulus package of $586 billion, or 7 percent of China’s GDP, for each of the next two years. The money will go for projects ranging from rural health and education to infrastructure.

The news gave a big boost to stock markets in Asia and Europe, but not in the U.S.

For more on China’s move and its likely impact, we turn to Fred Bergsten, director of the Peterson Institute for International Economics in Washington. He’s the author of “China’s Rise,” a new book about China’s global role.

And, Fred Bergsten, welcome back to the program.

Now, China had something like 12 percent growth last year. It’s still going to have very high growth this year. Why is it doing this?

FRED BERGSTEN, Peterson Institute for International Economics: The Chinese were terrified by a potential drop in their growth below 7 percent or 8 percent, which they view as a recession.

Anything below that level does not provide enough new jobs for the people coming into the labor force, moving out of the rural areas into the cities.

So they’ve taken steps now to try to assure they meet their growth target of 8 percent to 9 percent for this year, next year, 2010, all of which would shield them from the global recession and actually give a big push to the world economy from their side.

Stimulus is large-scale

MARGARET WARNER: Now, give us a sense of the scope of this, $586 billion, double that. Some commentators today were saying it's analogous to the New Deal. How big is it in relation to China's economy?

FRED BERGSTEN: In relation to their economy, it's, as you said, 7 percent to 8 percent of GDP for each of the next two years.

Now, one has to be a little careful because the package may have some things in it that were already on the drawing boards, might have been implemented anyway. But even with that, it's a big jolt.

It would be the equivalent to our stimulus packages exceeding $1 trillion in each of the next two years. What my colleagues Feldstein and Blinder were just talking about looks like peanuts by comparison.

MARGARET WARNER: So what is it going to be spent on?

FRED BERGSTEN: The Chinese have three big components in their program, not so different from what we're talking about here. A lot of it is infrastructure: roads, rural development in particular, all sorts of new sewage control facilities, new airports, additional subways, a whole range of infrastructure projects which will add to their investment capital.

Secondly, what economists call social overhead capital, spending on new health care facilities, spending on new schools and education needs, both of those incidentally needed by the Chinese for longer term purposes, highly desirable on development grounds and much sought by the population.

Third -- and it's only a small part -- they do have a few tax cuts. They're mainly corporate tax cuts to try to inspire more private investment.

So with those three parts, but infrastructure in their case is by far the biggest component.

China drives global economy

MARGARET WARNER: Now, as we reported, the markets in Asia and Europe soared on this news. Were the traders there right? Is this good for the global economy in a significant way?

FRED BERGSTEN: The traders were absolutely right. China is now by far the biggest single driver of the entire world economy. China accounts for about 10 percent of the world economy.

It's been growing about 10 percent a year. That's 1 percent for the global economy, which is now growing less than 3 percent. China is more than one-third of all global economic growth.

It makes a huge difference to the rest of the world, including us in the United States, whether China grows at 5 percent or 7 percent or 10 percent. The bigger they grow, the faster they grow, the better it is for us, the more likely we are to avoid a global recession.

MARGARET WARNER: And is the IMF right, in your view, when I think it is said that really, for at least the next year, probably all the significant growth in the world will come from these emerging economies?

FRED BERGSTEN: I think that's correct. The emerging economies as a group, led by China, but lots of others, now account for half the world economy.

Stimulus to benefit U.S.

MARGARET WARNER: So if we take the U.S., which has been both importing a lot from China, but also exporting a lot, how will this new spending actually affect U.S. businesses?

FRED BERGSTEN: It will help U.S. business a lot. The entirety of our U.S. economic growth over the last year has come from the improvement in our trade balance. Our domestic demand has been flat or negative already for the last year, but export expansion has been giving us at least some modicum of growth.

By far the biggest expansion in our export market is China. Our exports have grown to China 10 times as fast as they've been growing to the world as a whole, even though they've been growing fast in the aggregate. So, again, big payoff to the United States.

MARGARET WARNER: But what kind of things in particular that will be stimulated by this additional spending on the Chinese government's part?

FRED BERGSTEN: There's actually a nice fit. As I mentioned, the big part of the Chinese stimulus program is infrastructure, building new capital goods.

The U.S.'s biggest export category to China and the world is capital equipment. That's what we sell very well: turbines, generators, all sorts of equipment, Caterpillar tractors, all those things that go into the infrastructure projects in other countries, notably China.

So we should be a pretty substantial beneficiary of the Chinese stimulus package.

MARGARET WARNER: Another point of comparison with the U.S. Can China afford to do this and we can't because, what, they have no debt?

FRED BERGSTEN: China is the best positioned of all the big countries to launch a major stimulus program. They're running a budget surplus. They have very little, if any, debt. They're, of course, running a huge trade surplus externally, so there's no foreign constraint.

China is well positioned. They've taken advantage of this rapid growth period. They've done good boom management, which we have not, put themselves in a position. Now, when they need some ammunition, they've got it.

China's large role in G-20

MARGARET WARNER: And brief final thought. Is the timing an accident or on purpose, coming just ahead of the G-20 summit?

FRED BERGSTEN: Well, I think China does this mainly for domestic purposes, but the announcement may be linked to the fact that President Hu Jintao is coming to Washington this weekend with over a hundred delegates, incidentally, from China to play a big role in this G-20 summit.

And President Hu Jintao is in a very good position to indicate leadership of the global economic recovery strategy, challenge the United States, the Europeans, and others to match at least in part what he's done.

As I say, China has got the driving force, the number-one driver of the world economy. They'll be in a strong position at this meeting. We may be seeing some passing of the guard, in terms of global economic leadership.

MARGARET WARNER: Setting a very high bar, indeed. Fred Bergsten, Peterson Institute for International Economics, thanks.