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US vs. China bailout
US President Barack Obama signed the US$787 billion stimulus bill mid in mid February that seeks to combat the worst economic crisis since the Great Depression. The stimulus bill includes tax cuts, spending on infrastructure projects, expanded unemployment benefits, aid for small businesses and billions to help strapped states.
Ronald Haddock VP, Booz & Company
“In the US stimulus package, we see perhaps a bigger effect in consumption in the individual level due to the domestic impact of the tax reductions. In China, it perhaps is a little more difficult to estimate what that effect will be given that is primarily focused on the government’s infrastructure plans themselves.”
A: We talked about China. Now let’s talk a little about US stimulus package do you think it’s too much?
X: The magnitude is actually not too much. The downward economic force is more than 5% of GDP, they are putting together a program about 5% of GDP, and it will last longer than a year. So certainly it’s not bigger than the economic contraction. But the problem with the stimulus package is not really the size; it’s what’s in it. There’s a short-term impact, there’s long term efficiency. In terms of short term impact, we have roughly 250 billion dollars of tax cuts. Probably they are working into the economy relatively quickly. But everything else is not clear, because the rest of the program sort of looks like a wish list for the Democratic Party. Everything is thrown in, a few billion dollars for anti-smoking campaign, a few billion dollars for some library equipment and so forth. Maybe it’s all needed, but it doesn’t happen quickly enough to support the economy. The stimulus program should be separated into 2 parts; one is like a tax cut program immediately. Then the congress should take time to go through the rest and make sure the money is not wasted. But look at the package now, the quality is not very high.
A: Is there anything out of the US package that Chinese law makers should look at and think about implementing over here to help the economy here?
X: The tax code obviously is trying to get money into the pockets of the consumers as quickly as possible. That is a typical US approach to economic stimulus. That kind of thinking is lacking in China. When it comes to stimulus, the government is always thinking about giving more money to the government. Like a fixed investment, it’s all done by the government. So I think these led to a bigger and bigger government in China. That’s something China should think very carefully. The stimulus program in the US is very much geared towards the household sector. Maybe it does not work quickly, like the health care benefits and the medical care benefits extended to unemployed workers and so forth. It’s trying to help the people who don’t have jobs to have health insurance coverage. It’s all about helping out. I think that attitude is good.
A: What are your predictions for 2009?
X: We are in synchronized global hard landing. Japan’s economy contracted 3.3% in the first quarter of 2008, Europe 1.5%, and the US about 1%. In the first quarter, I think the numbers are going to be equally green. Maybe in the second quarter things are going to stabilize a bit and in the second half improve a bit with the government stimulus kicking in both the US and in China. But overall the year is going to be very difficult. It’s going to be a significant contraction of the global economy. It’s certainly the first time since 1930s. So I think this is indeed a very challenging situation.
A: I’ve read, from several other economists. They think China might be the first to emerge out of this downturn. What are your thoughts?
X: It’s possible. But it’s not a sure thing. Final demand is still deteriorating. For the Chinese final demand to improve, we got to fix the property market. The property market, the supply is so huge. Even at a cut-through price, really low price, it takes very long time to digest. Now we have very high price. The price in most cities, we talked about per square meter is about three months of salary. If it’s two months, it’s very cheap. But in the high-end, we have like four months, or even higher in Beijing and Shanghai. The globally norm should be like 1 maybe 1.5 like in HK. I think that even at a normal price, you can only sell that much property. In many cities I see, the properties that had been completed or under construction are equivalent to over 10 square meters per resident, and China’s stock is only 28 square meters per resident. We are talking about supply of 30% right there. They want you to buy. It takes long time to digest what we have. So the government needs to think carefully about it. First, the developers need to cut their prices; I think they have cut prices a bit. But another round is coming. At some point the developers cannot cut prices because they don’t have the margins to do so. Or they go bankrupt, as the Chinese economy depends on export, property and automobile, these three sectors. The property is very large. Unless in this sector the problems are fixed, it’s very difficult for the economy to get into strong growth path. I think people are very hopeful that China could recover first because the Chinese government doesn’t have a high level of debt. The household sector doesn’t have a high level of debt. It seems like the banking system is okay. But China has other problems, like the household sector does not have a lot of income. There’s a structure problem. The problem is the over supply of properties. So we need to fix the short-term problems and we need to introduce measures to improve the long-term prospect, then China is capable of recovering first.
Many experts say China’s economy hasn’t hit the bottom just yet. A record-breaking drop in exports, the property market is sagging and growth is down to single digits. The good news is pessimism in the market is beginning to wane and many believe China’s economy will be one of the first to reverse out of the global financial crisis.