China’s New Deal

China’s announcement to pump $586-billion into infrastructure projects and other stimulus measures to bolster domestic demand and shore up its weakening economy five days ahead of the Washington global economic summit of the G-20 group of leaders, which gave global stock markets a limited boost, highlighted Beijing’s global financial muscle. It also put America on notice that China can contribute to global stability and that it wants to play a bigger role with America and Europe in running the world economy.

The limited time scheduled for the G-20 meeting, a White House dinner and less than a full day of meetings, makes comprehensive change unlikely and the embrace of China by America even more remote. The long overdue embrace must come sooner than later. That is a longer term goal for China.

The stimulus package amounts to one-sixth of China’s annual economic output. Not a concern for China with its $2 trillion in foreign reserves and a reported fiscal surplus of $175 billion in the first half of 2008.

China’s immediate main aim is to keep the Chinese economy from slowing down to much to fast in order to avoid social and political instability. Tens of thousands of Chinese factories have closed down as export orders evaporate. China’s phenomenal growth to date was based on exports and investment. China’s economic output grew by 11.9 percent in 2007, 9.7 percent in 2008, and is projected to drop to 8.5 percent or lower in 2009. Although such numbers are music to any U.S. politicians ears, few countries, China included, can absorb a three percentage point falls in annual growth without problems. The government hopes its stimulus package will stimulate consumer spending.

Household consumption made up more than half of China’s GDP in the 1980s. Today it contributes less than a third. Chinese household savings have been as high as a quarter of disposable income. Corporate and government savings have also soared. China has been saving close to 60 percent of GDP.

The two year stimulus package, which includes tax cuts, loosening of credit and government spending through 2010, includes construction of low-income housing, transportation systems, rural infrastructure, technological innovation and disaster relief in the hope it will stimulate consumer spending. China’s economic stimulus package also benefits U.S. multinationals doing business in China which will have a positive effect in America.

China has set the bar for America and other countries to follow. China’s New Deal FDR economic model to boost local and global economic stability is one America and the rest of the world should follow. The basic fundamental solution of today’s global financial crisis lies in the plugging of America’s deficits with China’s savings. Americans have to save more as Chinese spend more.