Yesterday, China made a mammoth announcement that is a key maneuver I have been watching for: their own $568 Billion 'bailout'. This stimulus package is important for a number of reasons. Firstly, the directives involved stand in stark contrast to its US cousin: instead of bailing out banks (which China doesn't have to do because Asian banks on the whole only wrote down $27 billion as opposed to US bank losses of $660+ billion), the Chinese plan to invest heavily in infrastructure which will create jobs, low-rent housing to stabilize the falling housing market, and correct environmental challenges, while eliminating caps on lending to small businesses for banks.
From Bloomberg's article:
The package earmarks 100 billion yuan of central- government spending this quarter for low-rent housing, infrastructure in rural areas, roads, railways and airports. Investment by local governments and companies may boost that to 400 billion yuan, the State Council said.
Cutting Taxes
The government will also allow tax deductions for purchases of fixed assets such as machinery to stimulate investment, a move that will reduce companies' costs by an estimated 120 billion yuan.
Grain purchase prices and subsidies for farmers will be raised, along with allowances for low-income urban households. The government also said it had scrapped loan quotas, which limited lending by banks, to help small businesses.
http://www.bloomberg.com/apps/news?pid=20601068&sid=ajVKL6h0rTVw&refer=home
or Marketwatch.com:
This is a far cry from the US attempts to stimulate the economy which have not lead to job creation, a floor to the housing market, or more credit flowing to small businesses.
I note this move by the Chinese government because it is a vital moment in the transition of Empire. The shift of power from West to East is not going to be a smooth baton handoff in an Olympic relay: growth in the US has ground to a halt and might even contract; conversely China's growth, while slowing slightly, is still upwards of 8.5%, down from 10%. China's exports have been hurt by the decrease in consumption by the global economy. This stimulus package is part of China's plan to buy their way through this moment of transition: the Chinese consumer will eventually replace the US consumer as the global economic engine. This will occur as the yuan is allowed to appreciate against the dollar giving the Chinese the purchasing power the US currently enjoys. China is sitting on a mountain of cash and therefore has the ammunition to bail its way through this turbulent patch.
On the other hand, we find the US in a massive Catch 22: the Fed is being far from transparent on the $2 TRILLION of lending it has done of tax payer money. The claim is that if the Fed disclosed to whom it gave loans, against what collateral, at what value for said collateral, it would show those institutions asking for the loans to be weak, resulting in a run-on-the-bank or short-selling explosion.
This is from another Bloomberg.com article:
``You have to balance the need for transparency with protecting the public interest,'' Talbott said. ``Taxpayers have a right to know where their tax dollars are going, but one piece of information standing alone could undermine public confidence in the system.''
http://www.bloomberg.com/apps/news?pid=20601087&sid=aatlky_cH.tY&refer=home
The US Government's handling of this financial crisis is only staving off the inevitable. By lowering rates to close to zero, by bailing out AIG to the tune of $120 billion alone, and the scores of other actions, the US is now so much more indebted to the rest of the world, most significantly China.
Our infrastructure is crumbling: reports show that highways, bridges, and the power grid are in serious disrepair. Our jobs data show the nation heading towards the highest level of unemployment in decades. CEO's of our manufacturing sector have actively shipped American jobs overseas causing our workers to shift into being service sector workforce that spends too much and saves less than zero (living off credit from China and elsewhere).
The Chinese on the other hand do 95% of their transactions in hard cash, not credit. They save a vast amount of their income and don't live beyond their means. Their middle class is the size of the entire US population and they are a nation of producers.
Both countries are trying to spend their way out of crisis, but one is clearly in a much stronger position than the other. The baton of empire is clearly being passed from West to East.
