China's Bold Keynesian Plans Unveiled
China is about to pull out all the stops on Keynesian spending in an effort to prop up its ailing economy.
The National Development and Reform Commision just approved a massive list of road, rail, port and other infrastructure projects. The announcement comes on the heels of interest cuts earlier this summer and a slew of smaller local government stimulus efforts.
The news immediately boosted the Shanghai Composite by nearly 4% and, when coupled with the ECB's unlimited bond purchase announcement, helped the Euro rally through the end of the week. American markets didn't see the same benefit as another disappointing jobs report stifled any bullish sentiment.
The 25 new rail projects alone will cost 800 billion yuan, or about $127 billion. The total value of the projects approved will approach 2% of China's total economy in 2011, or $157 billion.
The speed at which the projects will be completed is going to amplify the economic boost. Instead of a slow and steady pace that could take close to a decade, the timeline for the rail projects range between three to eight years. Nomura Holdings Inc., Japan's largest securities firm, believes the accelerated spending will begin affecting China's economy as soon as the fourth quarter of this year.
China is also using an indirect method to partially cooldown an overheating housing sector. Several large cities are putting massive plots of land up for sale. By bolstering the amount of land available in its hottest real estate markets, housing supply should out-pace demand and partially contain property values.
Merrill Lynch economist Ting Lu reviewed the situation and sees a very positive outlook:
“We believe this new approach of policy stimulus is in the right direction because adding home supply and improving urban infrastructure are the two best ways to contain home prices, speed up urbanization and increase social welfare.”
Only time will tell how effective the measures will be. Nonetheless, the new announcement displays a warranted sense of urgency to address slowing growth, which may slip below 7% this year, That is very welcome news for a world that is increasingly dependent on China's growth to bolster national economies.+14
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