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China Gets It Right, But Hurts America
The announcement of a massive stimulus package of almost $600 billion shows that China means business not just in reviving, but also in rejuvenating its economy.
As both America and China confront the prospect of a global depression, both countries have chosen to fend off potential unrest with liberal government spending. But the Chinese move is bolder and more likely to succeed.
The most remarkable aspect of the Chinese stimulus plan is its enormous size. Despite the massive publicity surrounding its formidable growth rate, the Chinese economy is still ‘only’ one-fifth the size of America’s. Relative to its economy, China’s stimulus package would be the equivalent of a $3 trillion package in America.
The Bush-Greenspan asset booms were so extreme, and the resulting deleveraging so massive, that government actions in multiples of trillions of dollars are needed to make any meaningful impact in slowing the asset bust.
Based on this yardstick we can see that the differences in the Chinese and American approaches could not be more dramatic. The divergence bodes ill for the future.
The impact equivalent of China’s package of $3 trillion is 17.4 times that of America’s $172 billion. Of course, this does not include the $700 billion Bush TARP that was agreed to by Congress last month. But then, China did not have a financial system which needed a massive taxpayer bailout.
Although some Chinese investors may have been taken in by smart Wall Street salesmen peddling mortgage backed securities, the scale of these investments does not present systemic risk to China’s financial markets.
China has announced that the lion’s share of its stimulus spending will focus on modernizing the infrastructure of its country in preparation for challenging America as a super power in just a few more years.