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Tuesday, August 26, 2008


china bears

now that the spectacle of the olympics has gone, people might start growing a little more objective about china and its economic prospects. even with stock and property market crashes of (sans hyperbole) 1929-proportions underway there, many sinophile analysts are still glued to a mild-growth-slowdown-at-worst scenario.

but the reality now coming into focus might be very different. more from yves smith on a chinese government fiscal stimulus package which is being assembled even in the face of rampant monetary inflation.

China is considering a 370 bln yuan package of fiscal expenditures and tax cuts to stimulate the economy, the Economic Observer reported, citing a source close to the matter.

The report said said the plan includes 220 bln yuan in government spending and 150 bln worth of tax cuts.

she cites michael pettis:

If there really is such a program and if it is executed, and the newspaper cites an unnamed MoF official who claims that the proposal would have to go through many more stages before it became policy, the total fiscal stimulus would amount to a little under 1.5% of GDP.

Meanwhile Gregor Neuman alerted me to an article in today’s ChinaStakes. According to the article, in July, for the first time since 2003, tax growth has experienced a dramatic decline:

According to Ministry of Finance (MoF) statistics, China’s total revenue in July was RMB 532.325 billion, an increase of 13.8% over the same month last year. But this growth rate is 19.3 percentage points lower than in July, 2007, and 19.7 percentage points lower than the growth rate in the first half of the year.

The article goes on to say most sources of tax revenues showed sharp declines in growth rates, with corporate income tax actually down 4.2% from last July....

[I]t is worth noting that these numbers seem extremely volatile....

Meanwhile, tax from land and real estate, a major source of the local governments’ incomes, has also declined drastically ... Land transfer income has also decreased, due to the real estate market doldrums....

Liu Heng thinks the tax decline “won’t be a big problem”, since China has put a certain amount of money from its tax income every year into a rainy day account.

Perhaps. Unfortunately, as the saying goes, when it rains, it pours.

one may easily recollect that the decline in tax receipts to the states here in america was one of the coincident indications that something fairly severe was in the pipeline. that condition has worsened significantly.

all mainstream projections for global growth are predicated on relatively strong growth in asia, particularly in china and india. in yves smith's words:

I seem to remember that the assumption heretofore that China would still have 8% growth (versus its recent 11%-12%) even with a global slowdown. But anything much below that level would be deemed to be a Very Bad Outcome.

but what of an outright contraction in china? i think one of the reasons so few countenance the possibility is that the potential implications are so diabolical as to scare off comment, which would in several quarters quickly be deemed "irresponsible". jim hamilton recently set out the dynamics of economic contraction, how a recession is far different from a growth slowdown because of the nonlinear flow of malefactory feedback loops set up by negative income expectations.

there are a lot of american and indeed global jobs predicated on very positive chinese income expectations. recession and the resulting financial instability in china would have massive global ramifications -- including quite possibly a rapid fall of the curtain of vendor finance, precipitating the end of the empire.

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