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September 11, 2012

China's central and local governments plans 12.6 trillion RMB (Over US$2 trillion) in spending

Forbes - Weak economic data from the world’s second largest economy continues to stoke fears that as China slows down, it will exacerbate the cooling of the global economy. But it shouldn’t be all gloom and doom, according to Nomura’s economic research team, which suggests Chinese output will rebound sharply in the fourth quarter on the back of a stimulus plan worth about one trillion RMB ($158 billion) and monetary easing by the People’s Bank of China.

While GDP is expected to grow only 7.7% in the third quarter, Nomura’s research team forecasts a sharp rebound in the fourth quarter, with output expanding 8.8%. Infrastructure investment will play a prominent role in this recovery. Total planned investment for new projects started in August rose 33% year-over-year in August, up from 25% in the previous month; it’s forecasted to grow more than 40% this year.

Power stations, wind farms, airports, water supply, sewage treatment, and waste incineration power plant projects have also been announced, worth together around one trillion RMB, Nomura’s estimates show, or 2.1% of GDP. These projects take an average of four years to complete, and are normally started with a three to four month lag, they explained.

Local governments have also pledged about 11.6 trillion RMB in development projects that last anywhere from three to five years to complete. That translates into $1.83 trillion or 23% of GDP, dwarfing the four trillion RMB 2008 fiscal stimulus. While it isn’t entirely clear that these projects will indeed go through in the long run, Nomura expects investments in several of these to pick up over the coming months.

China's local government and central government infrastructure and development projects are going to be about US$2 trillion over four years.

The United States has an eleven month budget deficit of 1.17 trillion. The United States will likely have another $4 trillion in new deficit spending for the next four years.



Seeking Alpha has an analysis of why it is a myth that China's economy is export dependent

In 2006, Malaysia reported total goods exports of 104% of GDP, which would appear to imply that Malaysia's export sector was paradoxically larger than the Malaysian economy itself. In 2009, Singapore's export-to-GDP ratio was nearly 200%.

Export figures in excess of 100% occur because exports are defined as total turnover (like gross revenue) while GDP is measured in value-added terms (like net profit).

So let's imagine a Chinese company that makes rubber swimming pools for export. The company has 500 employees, produces US$2,500,000 worth of products using only domestically-sourced materials, and generates US$1,000,000 in wages + corporate profits a year. Using our framework above, we have a 100% domestic content ratio and a 40% domestic value-added ratio, and the company is contributing US$1 million to domestic GDP.

Now imagine that the company changes its business model; instead of making rubber swimming pools, it decides to make iWidgets using the same 100 workers. The company now imports US$22,500,000 worth of imported inputs from abroad, processes these inputs with a minimum of additional domestic sourcing and generates US$25,000,000 of export revenue. At the end of the year, the company finds that wages and profits have risen to US$2.5 million.

We now have a 10% domestic content ratio, a 50% domestic value-added ratio, and the company is now contributing US$2,500,000 to domestic GDP. The actual contribution of the exports to China's GDP has gone up by 50%. The value-added-per-worker has increased from US$10,000 to US$12,500. But the export/GDP ratio has now increased by a factor of 10.

Why? Because the export/GDP ratio didn't discount the imported materials ("churn"). It just lumps everything into "exports," regardless of where the materials actually came from. These "made in China" goods actually have very little in them that was made domestically in China.

According to annual surveys, roughly 45 million of the 228 million workers employed in Chinese Industry work in the export sector.

That sounds like a lot, right? But there are 1.35 billion people in China, of which approximately 795 million are in the work force in some capacity. How do 45 million Chinese workers - manual laborers, for the most part, working in companies that operate on Foxconn's margins- produce $1 out of every $3 in China (the claim that exports are one third of China's economy) ? The workers don't and exports are not that much.



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