China's great leap sideways
The Chinese government has unveiled a stimulus package of massive proportions in an attempt to defend a minimum level of growth. A failure to galvanise the economy could be disastrous, both at home and abroad.
Now, that's a stimulus package! Over the weekend China announced a four trillion yuan ($850 billion) raft of spending measures designed to shore up a flagging economy. The package, and the language surrounding it, is good news for the regional economy and our resource companies in particular.
Where the Rudd Government announced an injection of spending equivalent to about one per cent of GDP last month, China's State Council has unveiled stimulus that amounts to almost 20 per cent of GDP. It has made it clear that it will do whatever it takes to boost growth, which fell to its lowest rate in five years – 9 per cent annualised growth in GDP – in the September quarter.
The council said that its boosting of spending "must be fast and heavy-handed." It also said China's central bank, which has already reduced official rates three times in two months, would pursue a moderately loose monetary policy.
The package is targeted at low-rent housing, roads, rail and airports and rural infrastructure. There are also measures designed to lift investment in plant and machinery, increased farm subsidies and the lifting of restrictions on bank lending. There are estimates that, with the multiplier effect of the package on private sector spending, it could add two percentage points or more to China's growth rate.
The decisiveness of China's response to the first single digit growth number in five years confirms the external view that China has a "line in the sand," or minimum growth rate, that it will defend at all costs.
The consensus view is that China's economy needs to grow at a minimum of eight per cent a year to manage the mass migrations from its rural areas to its cities without undue social dislocation or political stress. It has a lot of fiscal firepower to support its ambitions.
The announcement of the package came a bit late for the world's iron ore miners, with Rio Tinto today following rival producer Vale in announcing production cut-backs. It has revised down its estimates of 2008 by about 20 million tonnes to between 170 million and 175 million tonnes and will reduce the annualised rate of production from its Pilbara mines by about 10 per cent. BHP Billiton has yet to announce any reduction in its output.
The iron ore producers are responding to the steep fall in iron ore spot prices and rapidly building stockpiles of ore in China, as demand for steel plummets and rafts of marginal steel producers shut down production. With the 2009 iron ore benchmark pricing negotiations just getting underway, the likelihood is that producers will face both price and volume declines for the first time in several years.
The Chinese measures do, however, help buttress the conviction of Rio Tinto's Tom Albanese that the slowdown in China will be short and sharp and that demand will rebound through 2009. In fact it almost has to if the Chinese are going to maintain economic and social stability.
China's measures were announced after a meeting of the G-20 nations' finance ministers and central bankers in Brazil which made it clear that developing countries would do what they could – using both fiscal and monetary policies – to blunt the impact of the rapid slowdowns in the economies of the developed countries on the global economy.
There is a now a global consensus and a loosely-coordinated effort to spend whatever it takes and do whatever it takes to soften the impact of what is likely to be a severe recession in most of the developed world.
For a very hard landing to be avoided, the growth rate China achieves – it has been the major contributor to global growth in recent years – is critical. For the Australian economy, which is in better shape than most, it is probably going to determine whether we experience an economic slowdown or a relatively mild recession.
Where the Rudd Government announced an injection of spending equivalent to about one per cent of GDP last month, China's State Council has unveiled stimulus that amounts to almost 20 per cent of GDP. It has made it clear that it will do whatever it takes to boost growth, which fell to its lowest rate in five years – 9 per cent annualised growth in GDP – in the September quarter.
The council said that its boosting of spending "must be fast and heavy-handed." It also said China's central bank, which has already reduced official rates three times in two months, would pursue a moderately loose monetary policy.
The package is targeted at low-rent housing, roads, rail and airports and rural infrastructure. There are also measures designed to lift investment in plant and machinery, increased farm subsidies and the lifting of restrictions on bank lending. There are estimates that, with the multiplier effect of the package on private sector spending, it could add two percentage points or more to China's growth rate.
The decisiveness of China's response to the first single digit growth number in five years confirms the external view that China has a "line in the sand," or minimum growth rate, that it will defend at all costs.
The consensus view is that China's economy needs to grow at a minimum of eight per cent a year to manage the mass migrations from its rural areas to its cities without undue social dislocation or political stress. It has a lot of fiscal firepower to support its ambitions.
The announcement of the package came a bit late for the world's iron ore miners, with Rio Tinto today following rival producer Vale in announcing production cut-backs. It has revised down its estimates of 2008 by about 20 million tonnes to between 170 million and 175 million tonnes and will reduce the annualised rate of production from its Pilbara mines by about 10 per cent. BHP Billiton has yet to announce any reduction in its output.
The iron ore producers are responding to the steep fall in iron ore spot prices and rapidly building stockpiles of ore in China, as demand for steel plummets and rafts of marginal steel producers shut down production. With the 2009 iron ore benchmark pricing negotiations just getting underway, the likelihood is that producers will face both price and volume declines for the first time in several years.
The Chinese measures do, however, help buttress the conviction of Rio Tinto's Tom Albanese that the slowdown in China will be short and sharp and that demand will rebound through 2009. In fact it almost has to if the Chinese are going to maintain economic and social stability.
China's measures were announced after a meeting of the G-20 nations' finance ministers and central bankers in Brazil which made it clear that developing countries would do what they could – using both fiscal and monetary policies – to blunt the impact of the rapid slowdowns in the economies of the developed countries on the global economy.
There is a now a global consensus and a loosely-coordinated effort to spend whatever it takes and do whatever it takes to soften the impact of what is likely to be a severe recession in most of the developed world.
For a very hard landing to be avoided, the growth rate China achieves – it has been the major contributor to global growth in recent years – is critical. For the Australian economy, which is in better shape than most, it is probably going to determine whether we experience an economic slowdown or a relatively mild recession.
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