China's economic stimulus plan targets its infrastructure

ByCalum Macleod, Usa Today
November 11, 2008, 10:01 PM

BEIJING -- When China's President Hu Jintao attends the economic summit in Washington on Saturday, the rest of the world may have its hand out.

But other countries shouldn't expect a bailout, despite China's new $586 billion spending package heralded as China's "New Deal" or its record-breaking $2 trillion in foreign exchange reserves.

"China will be under a lot of pressure to come up with more money to rescue the global economy," says Frank Gong, a Hong Kong-based economist at J.P. Morgan, ahead of Saturday's summit of the G-20 group of countries.

"But this plan helps China stand by its position: To stabilize the Chinese economy is the best contribution China can make," he says.

China's massive stimulus package should boost confidence at home and enable Hu "to go to Washington and say, 'China is doing its bit for global demand,' " says Arthur Kroeber, managing director of Dragonomics, a research firm in Beijing. "China wants to be seen as part of the solution and be perceived as a responsible global citizen."

The largest stimulus plan in China's history calls for new housing, roads, railways and airports, plus rebuilding areas devastated by the May 12 earthquake.

"Although some of the spending has already been planned, you need to measure the size of the package against the size of the economy," Gong says. "China will increase spending in the next two years by 5% of GDP (gross domestic product). That's huge, and more aggressive than I expected."

Gong says Beijing is unlikely to spend money on direct bailouts, but it may contribute "a little more to global organizations like the IMF (International Monetary Fund) and the World Bank. But it will want more voting power and representation."

Kroeber agrees. China's leaders "will only put up more money if they get a clear promise" of more votes. "China will be driving a hard bargain," he says.

China also spent huge sums on infrastructure and factories in the late 1990s to survive the Asian financial crisis, says Ting Lu, a China economist at Merrill Lynch in Hong Kong.

"But this time around it's different. We call it 'China's New Deal,' " Ting says, referring to U.S. President Franklin Roosevelt's plan to jump-start the economy in the 1930s. Ting says the new stimulus measures are aimed to help China's countryside, where two-thirds of the nation's 1.3 billion people live.

"If you want to stimulate consumption, and persuade them to buy TVs, washers and fridges, you must provide electricity, running water and TV signals. It needs significant infrastructure investment in rural areas," he says.

Sherman Chan, an economist in Moody's's office in Sydney, expects Beijing to announce more stimulus measures soon.

"If China gives off a confident image," Chan says, "that will help sentiment recover across the region and the rest of the world."

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