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1U.S. Bureau of Labor Statistics2University of Michigan3International Labor Organization4Global Development Finance 2009, World Bank5USChina.org6State Administration of Foreign Exchange of China; U.S. Department of the Treasury7World Economic Outlook, International Monetary Foundation, October, 2009

When the New Century Financial Corporation was

delisted from the New York Stock Exchange on March

13, 2007 and entered bankruptcy less than three

weeks later, few thought this event was the harbinger

of a global economic crisis. However, what began as a

problem caused by bad subprime mortgages spread

like a virus throughout the American financial system.

As the housing market plummeted, financial

institutions watched the veil of security fall away

from years of irresponsible lending based upon the

expectation of its continuous growth. In 2008, the US

investment banking industry was decimated by the

collapse of two of the largest investment banks, Bear

Stearns and Lehman Brothers, the acquisition of

Merrill Lynch by Bank of America, and the transition

of Goldman Sachs and Morgan Stanley from

investment banks into bank holding companies. As

the American financial system was thrown into

turmoil, lending came to a halt and the effects of this

financial crisis were felt throughout the global

economy and financial system. The impact has been

profound, and the US is still experiencing its effects.

The economy went into recession and unemployment

rates skyrocketed, reaching 9.8% in September 2009.1

Consumer spending, a key engine of the United States’

economic growth, decreased significantly in the wake

of the crisis; auto sales hit a 27 year low in January

2009, and the consumer confidence index fell from

over 70 in September 2008 to only 55.3 in November

of that year.2 The American economy had not faced

such a crisis since the Great Depression in the 1930s.

The decline of the US financial system and economy

was not isolated, and has had massive effects on

today’s integrated global economy. Unemployment

rates increased throughout the world, as a result of

layoffs and hiring freezes. The International Labor

Organization projects the global unemployment rate

to be between 6.5% and 7.4% by the end of 2009,

compared with 6.0% in 2008 and 5.7% in 2007.3 A

report by the World Bank on June 22, 2009 estimated

that the global economy would contract by 2.9% in

2009 compared to growth of 3.8% in 2007 and 1.9%

in 2008. While perhaps the largest impact of the crisis

has been on the developed economies most

connected to the US financial system, the developing

world has also been adversely affected. Developing

economies watched their growth rates shrink from

8.1% in 2007 to 5.9% in 2008 and to a projected 1.2%

in 2009.4

Of particular interest is the effect of the financial

crisis on China, whose economy has become

increasingly intertwined with that of the United

States. The links between the world’s largest

economy and the largest developing economy, which

also represent the largest import and 2nd largest

export markets respectively, are profound and

complex. With China-U.S. bilateral trade valued at

$409 billion in 2008, the US is China’s largest trade

partner, meaning that changes to demand in the US

have massive effects on China’s exports.5

Furthermore, China’s substantial holdings of US

dollars (representing an estimated 70% of China’s

$2.27 trillion foreign exchange reserve) and Treasury

bills ($800 billion) tie China’s economic fortunes to

the stability of the dollar.6 The closeness of this

economic relationship has become increasingly

evident as China has felt the repercussions of the

crisis. Growth rates have decreased remarkably, from

a healthy 13.0% in 2007, before the crisis, to a

projected 8.5% in 2009.7 More noticeably, urban

unemployment stood at 4.3% for the first two

quarters of 2009, and has disproportionally affected

- 1 -

Chapter 1

Introduction

graduating college students, among whom the

unemployment rate is 32% as of July 1, 2009.8 The

consumer confidence index published by the National

Bureau of Statistics is down as well, reaching the

comparably low level of 88.0 in August 2009,

compared to 93.7 one year ago.9 While China’s

economy still continues to grow, its leadership is

understandably worried about the country’s ability to

maintain the robust economic growth that the

Chinese people have come to expect.

In the wake of the financial crisis, governments

around the world have taken steps towards both

economic rescue and recovery. Countries have

understandingly looked to their own domestic needs,

through disbursing funds to address vulnerable

aspects of their economies and to protect those

industries bearing the brunt of the downturn. One of

the primary lessons of the crisis has been the reality

of globalization: changes to a nation’s economy have

the potential to reverberate throughout the entire

global system. Given the importance of the United

States and China in the world economy, their

responses to the financial crisis have the potential to

have global effects and alter the post-crisis economic

landscape.

The 5th Annual China Institute Executive Summit was

held in Beijing from April 26-28, 2009. This forum

brought together corporate leaders, entrepreneurs,

and government officials from both the US and China

to discuss the possible effects of the crisis on bilateral

economic ties, and to explore avenues for the two

countries to work together towards economic

r e c o v e r y . F o l l o w i n g u p o n t h e s u m m i t ,

SmithStreetSolutions conducted a study examining

the effects of the US and China economic stimulus

packages on promoting global recovery and shaping

the post-recovery world. To this end, we engaged in

an independent analysis in order to gauge the

potential short and long term effects of each stimulus

package. Additionally, we conducted in-depth

interviews with a number of key summit attendees

regarding the potential of the stimulus packages to

promote economic recovery.

Our research provided us with a series of conclusions.

Given the vast differences between the US and

Chinese economies, and how they were effected by

the financial crisis, their two packages are not directly

comparable in their mechanisms or domestic effects.

The US, a consumer driven nation facing a recession

and a stalled economy due to curtailed consumer

spending, targeted its stimulus at promoting

domestic consumption. China, a developing country

and largely insulated from the global financial crisis,

utilized the slowdown as an opportunity to accelerate

its long term development goals to promote lagging

rural and western development and upgrade

industrial infrastructure. The slowdown created by

the crisis created a significant opportunity to advance

these goals, as the necessary investments and

government expenditure had been withheld due to

overheating concerns over the past few years. At this

point, it is still too early too judge the efficacy of each

stimulus package in promoting recovery, as most

funds have yet to be disbursed. However, we expect

both packages to have a positive contribution

towards global economic recovery by promoting

international trade. Boosts in domestic consumption,

especially in the US, and China’s need for imported

machinery and technology should drive international

trade that will promote the recoveries of the

countries involved.

- 2 -

8National Bureau of Statistics of China; Ministry of Human Resource and Social Security of China9National Bureau of Statistics of China

In the wake of the financial crisis, both the US and

China undertook measures to promote their own

independent recoveries. In the United States, the

initial actions taken in response to the crisis were

economic rescue measures to stabilize the economy.

The immediate problem at hand was the US financial

system, whose dramatically scaled back lending was

harming the economy and causing the usual Federal

Reserve economic controls to be ineffective. On

October 3, 2008, Congress passed the Emergency

Economic Stabilization Act of 2008 (EESA), with the

goal of restoring liquidity and stability to the financial

system of the United States.

The fundamental component of this act was the

Troubled Asset Relief Program (TARP), which broadly

authorized the Secretary of the Treasury to buy

troubled assets. Initially budgeted at $350 billion, the

TARP program was expanded by Congress to $700

billion in January 2009. A number of programs

targeting different areas of the US financial system

were created under TARP, including aid to

homeowners, financing for US auto manufacturers,

and government investment into financial institutions

to help promote lending. This third program, the

Capital Purchase Program, allowed the government

to purchase senior preferred shares in financial

institutions and was budgeted for $250 billion. Nearly

a year into the program, the emergency ‘bailout’

nature of the Capital Purchase Program is becoming

apparent, as many banks are choosing to exit the

program as soon as it is economically sound to do so.

Also tied to the EESA was the Termed Asset-backed

Loan Facility, or TALF, to promote consumer and

business loans and restore liquidity to the financial

system. Under this program, the Federal Reserve

provides loans to financial institutions in order to

purchase asset-backed securities collateralized by

student, auto, credit card, or small business loans.

Initially budgeted at $200 billion, the program has

expanded to over $1 trillion in lending from the

Federal Reserve Bank of New York. While both TARP

and TALF represent significant measures to counter

the financial crisis, their focus was on stabilizing the

US financial system.

On February 17, 2009, US President Barack Obama

signed the American Recovery and Reinvestment Act

(ARRA), commonly known as the US economic

stimulus package. The bill included a total of $787.2

billion (5.5% of the 2008 US GDP) in government

allocations, the vast majority of which is to be used to

save US jobs and jumpstart the economy.10

Proponents of the bill claim it will save 3 to 4 million

American jobs and the strict accountability measures

built into the bill will ensure responsible distribution

and use of funds. As of October 13, 2009, $288 billion

of these funds had been made available to Federal

agencies and $116 billion (15% of the total allocation)

had been spent.11

Social welfare provisions provided the lion’s share of

the stimulus, with individual tax relief and state and

local fiscal relief forming over half of the total

package. Other significant allocations went towards

infrastructure, scientific R&D, and the US healthcare

and education systems. Also included in the package

were a number of non-recovery related items that

were part of long term plans or were otherwise

desired by Congress. In order to pay for the bill, US

government spending is expected to surge, increasing

the US federal deficit, trade deficit, and the global

supply of US dollars.

- 3 -

10Recovery.gov; CIA World Factbook11Recovery.gov

Chapter 2

Packaging Recovery

The US stimulus package was fairly divisive among our

respondents, with 54% believing that it was not

appropriate given the global context of the financial

crisis, and could be improved. Many voiced similar

objections to those of the bill’s opponents in

Congress, namely that the bill represented excessive

government intervention that will harm the free

market economy in the long run. However, the

majority of our survey participants felt that the US

stimulus package addressed the key US needs to

boost consumer confidence and domestic

consumption, crucial ingredients for the recovery of

the US economy.

Compared to the US, the effects of the financial crisis

on China have been less severe. While the growth

rate of the economy slowed, China never entered

recession. On November 5, 2008, Premier Wen Jiabao

called a meeting of the State Council Standing

Committee to create a plan to boost domestic

demand and maintain the momentum of the rapidly

growing Chinese economy. By November 9, the

stimulus initiatives and the total size of the package

were announced, and the specific allocations were

released by the National Development and Reform

Commission on November 27. The Chinese stimulus

package includes $586 billion (RMB 4 trillion, 13.3% of

the country’s 2008 GDP) in allocations aimed towards

a wide variety of projects.13 Infrastructure projects

and reconstruction from the 2008 Sichuan

earthquake represented the largest allocations, with

- 4 -

Breakdown of the US Economic Stimulus Package12

$ Bn

Source: Recovery.gov

significant funds also going towards rural

development, technological advancement,

sustainable development, and other forms of social

welfare. In March 2009, the package allocations were

amended by the National People’s Congress. This did

not alter the total size of the package, but funds were

rechanneled towards expediting crucial social welfare,

rural development projects, and public works.

Shortly after announcing the package, the national

government revealed that it would only be supplying

$173 billion (RMB 1.18 trillion) of the stimulus funds,

with the remainder expected from local governments

and the private sector. To help local governments

finance their share, the central government is issuing

bonds for the local governments, and the debt of

these bonds will be transferred to their deficits. The

reliance upon local governments and private

businesses raised some doubts about the efficacy of

the plan, as some consider these sources of funding

to be unreliable, due to the poor cash situation of

many local governments and doubts about the

willingness of private participation. Most of the

purely public projects will be completely funded by

the central government, and the government will

partner with the private sector for semi-public

projects. Importantly, many of these latter

infrastructure projects are expected to be profitable,

increasing the likelihood that private businesses will

be willing participants. By the end of October 2009,

$80.46 billion (RMB 550 billion, 13.8% of the total

Science,

63

Tax Relief,

213

Protecting the

Vulnerable,

142Education &

Training,

126

Healthcare,

107

Energy,

65

Infrastructure,

63

Other Social

Programs,

8

Total = $787 billion

Breakdown of the China Economic Stimulus Package14

$ Bn

Source: Sdpc.gov.cn

Sustainable

Development,

31

Infrastructure,

220

Post-Quake

Reconstruction,

147

Protecting the

Vulnerable,

59

Technology

Advancement,

54

Rural

Development,

54

Other Social

Programs,

7

Total = $586 billion

Education,

7

Healthcare,

7

12Based on two assumptions:

1. Education programs, healthcare programs, and tax relief in State and Local Fiscal Relief share the same amount of allocation out of the total $144 billion.

2. Infrastructure and science share the same amount of allocation in the fund allocated for the two categories totaling $126 billion. (Apart from the $111billion originally put aside for

Infrastructure and Science, the largest category of the ARRA, Tax Relief, includes $15 billion for Infrastructure and Science.)13National Development and Reform Commission of China; CIA World Factbook14Based on the assumption that education, healthcare, and other social programs share the same amount of allocation out of the smallest broad area of the package totaling $22 billion.

allocation) has been paid out by the central

government, the majority of which is going towards

rural development, public infrastructure, and social

welfare projects.15

When asked about the efficacy of the China economic

stimulus package, a slight majority of our respondents

believed the allocations were appropriate. One

common criticism was that the package did not place

enough emphasis upon promoting consumption in

order to boost domestic demand. However, many of

the experts applauded the focus on infrastructure

development, which increases government spending

while promoting the long term growth of China’s less

developed areas in the west and countryside. Given

the large disparities in income and industrial

development between the eastern seaboard and the

interior, efforts to improve this infrastructure in

particular will be a key to China’s long term economic

success.

When comparing the two stimulus packages, it

becomes clear that similarities between the two

packages regarding areas of fund allocations exist

only on the surface. Both the US and Chinese

economies are fundamentally different, have been

effected by the financial crisis in differing ways, and

require stimulus packages catering to their individual

- 5 -

Comparison of the US and China Economic Stimulus Packages

Note: The comparison of the two packages is based on the following assumptions:

1. Regarding the US package, education programs, healthcare programs, and tax relief in State and Local Fiscal Relief share the same amount of allocation out of the total $144 billion.

2. Regarding the US package, infrastructure and science share the same amount of allocation in the fund allocated for the two categories totaling $126 billion.

3. Regarding the China package, education, healthcare, and other social programs share the same amount of allocation out of the smallest broad area of the package totaling $22 billion.

Source: Recovery.gov; National Development and Reform Commission of China

The US Package The China Package

No. CategoryAmount

($ Bn)

% of

Total Where the Money Is Going

Amount

($ Bn)% of Total Where the Money Is Going

1Protecting the

Vulnerable 142 18.0%

Funds for social safety net programs,

such as welfare, food stamps, child

support, and other forms of

assistance

59 10.0%

Social welfare plans, including

low-cost housing, rehabilitation

of slums, and other social safety

net projects

2Education &

Training126 16.0%

Improving the quality of American

education and making it more

accessible to the underprivileged

7 1.3% Educational Programs

3 Healthcare 107 13.6%

Offsetting rising medical expenses

and rescuing the ailing Medicare

system

7 1.3% Healthcare Programs

4

Energy

(Sustainable

Development)

65 8.3%

Promoting sustainable development,

largely through developing new

energy

31 5.3%

Promoting energy saving, cutting

emissions, and environmental

engineering projects

5 Infrastructure 63 8.0%A wide variety of transportation and

federal infrastructure projects220 37.5%

Construction of infrastructure,

mainly in transportation

6

Science

(Technology

Advancement)

63 8.0%

Reinforcing the United States’

leading position as a technological

innovator

54 9.3%Transforming manufacturing

towards high-end production

7Other Social

Programs8 1.0% - 7 1.3% -

8Tax Relief and

Other213 27.1%

Recovery tax cuts for various

purposes- 0.0% -

9Post-Quake

Reconstruction - 0.0% - 147 25.0%

Reconstruction projects for the

May 2008 Sichuan earthquake

10Rural

Development - 0.0% - 54 9.3%

Building public amenities,

providing safe drinking water,

etc.

Total 787 100.0% - 586 100.0% -

15National Development and Reform Commission of China

needs. The US stimulus reflects the fact that the US

economy is consumer driven. In 2008, private

consumption constituted 70.2% of the $14.26 trillion

US GDP, with investment, government purchases, and

net exports representing 14.6%, 19.8%, and -4.5%

respectively.16 While the US stimulus package

promotes recovery through some direct

infrastructure spending, the key focus of the package

is to boost lagging domestic consumption by keeping

people employed in the public sector and placing

money back into consumers’ pockets through tax

relief, government welfare programs, and other

forms of aid. Compared to the US, China’s economy is

very different. Private consumption plays a much

smaller role in China’s economy, accounting for 35.3%

of China’s 2008 GDP of $4.402 trillion, and growth is

driven by investment, net exports, and government

purchases, representing 43.5%, 7.9%, and 13.3% of

the country’s GDP respectively.17 Additionally, China’s

development has been unequal between regions and

its industrial and transportation infrastructure is still

incomplete. The Chinese package places its focus on

investing in infrastructure; even allocations such as

rural development and protecting the vulnerable,

have significant infrastructure characteristics. As such,

the Chinese package creates jobs and pumps money

into the economy in the short run, with the ultimate

goal of building the infrastructure necessary for

sustained growth.

- 6 -

16Economist Intelligence Unit 17Emerging East Asia - A Regional Economic Update, Asia Regional Integration Center, July, 2009

One of the major effects of the financial crisis has

been the dramatic decrease in US domestic

consumption, due to an increase in unemployment,

lowered wealth, and decreases in consumer

confidence. Since private domestic consumption

comprised 70.2% of the 2008 US GDP, this drop in

consumer spending is adversely affecting the

revenues of US companies and is exacerbating the

negative economic affects of the crisis.18 As such, the

US package places a large emphasis on boosting

domestic consumption in order to jumpstart the

engine of recovery.

The US package dedicates $81 billion towards funding

social welfare programs that are crucial in supporting

America’s lower income brackets, such as

unemployment funding, food stamps, child support,

and other forms of economic assistance initiatives.

The US has allocated $61 billion in tax relief

specifically for low income households. The bulk of

the additional $213 billion tax relief goes towards

individuals and businesses with the overall goal of

promoting employment and productivity. Taken

together, these measures represent 45% of the US

package and will put $355 billion back into the

pockets of American citizens.19 This will be

accomplished through direct tax relief, social welfare

programs, and increased employment, which will

increase the buying power of US consumers and

promote domestic consumption.

In the US package, the combined healthcare and

education allocation is $233 billion, representing

roughly 30% of the total package. Of this, $107 billion

or 13.6% of the total, is being invested in healthcare,

with the goal of offsetting rising medical expenses

and rescuing the ailing Medicare system. While the

US healthcare system has a wealth of technological

18Economist Intelligence Unit19Based on the assumption that education programs, healthcare programs, and tax relief in State and Local Fiscal Relief share the same amount of allocation out of the total $144 billion.

- 7 -

Chapter 3

Consumer Nation

The US package places a large

emphasis on domestic consumption

in order to jumpstart the engine of

recovery

resources and expertise, it is plagued by a poor

distribution system that leaves 33.1% of the

population under the age of 65 without medical

insurance coverage.20 The stimulus funds represent a

one time injection of funds amounting to 4.28% of

the United States’ 2009 estimated health spending of

$2.5 trillion, and will be going towards supporting

medical services for those least able to afford them.21

By decreasing the medical expenses of America’s

underprivileged, this portion of the stimulus will

increase their disposable income.

Regarding education, the US has allocated $126

billion, or 16% of its package, towards improving the

quality of US education and making it more accessible

to the underprivileged.22 Higher education is costly in

the US, making it difficult for low-income students to

finish their education. This has only worsened during

the crisis. Due to the economic slump, shrinking

university endowments, and a decrease in education

investment, tuition standards have been steadily

rising over the past few years. Many of the US funds

are destined to flow to the college students directly

through federal education grants. Other large funding

outlays go towards local school districts, in order to

allow them to avoid cutbacks in services and teaching

staff, and allow them to offer modern classrooms to

their students. While all of these have the primary

goal of providing a quality education system, they will

have effects on consumption as well. By subsidizing

college students and funding of local education

programs, more money is injected into local

economies, and teachers and other education staff

remain employed.

As a result of all of these measures, nearly $600

billion of funds will provide tax relief, improve social

welfare services, and improve public sector

employment, creating a positive affect on disposable

income and consumer confidence in the US. The

expected increases in domestic consumption, as a

result of this massive capital influx, are expected to

drive demand for imports, which currently comprise

44% of all consumer goods sold in the United

States.23 Not only will this benefit US consumers, it

will also greatly benefit the exporting economies that

cater to US demand. This is especially true for lower

cost exporters, such as China, that are able to

compete with the price of US domestic goods. Overall,

this increase in consumption-driven imports will have

a positive influence on the global economic recovery.

- 8 -

20Families USA21U.S. National Coalition on Health Care22Based on the assumption that education programs, healthcare programs, and tax relief in State and Local Fiscal Relief share the same amount of allocation out of the total $144 billion.23U.S. Consumer Product Safety Commission

Increases to domestic consumption

are expected to drive demand for

imports, which make up 44% of all

consumer goods sold in the US

In contrast, the Chinese stimulus package is in line

with China’s long term development goals outlined in

the 11th Five Year Plan. Nearly all of the allocations

provided by China’s stimulus are consistent with the

plan’s major goals of promoting concordant

development of regions, upgrading industrial

structures, and building a conservation-minded and

environmentally friendly society.24

“Promoting the concordant development of regions”

refers to the coastal-inland and urban-rural

imbalances that exist in the Chinese economy. During

China’s 10th Five Year Plan, it became apparent that

China’s rapid development was unequal between

regions, and that the economic gaps between urban

and rural areas and between regions were

increasing.25 Unlike the United States’ developed

domestic consumption market, China’s rural and

western consumer markets are a long way from

reaching their potential. The development of these

regions lags far behind China’s coastal areas and

urban centers, and poor transportation connections

to the coast and the rest of the world form a barrier

to international trade and investment. Promoting

their economic development, as well as their logistic

ties to the rest of the country, will be an integral

factor towards increasing the productivity and buying

power of a relatively untapped market. In recent

years, the gap in personal consumption expenditure

between urban and rural areas has been expanding.

The ratio of per capita personal consumption

expenditure in urban areas compared with that of

rural areas was 3.1:1 in 2007.26 Building up

infrastructure in underserved areas will be the key to

their economic development and in unlocking their

untapped consumer markets. Despite the importance

of building infrastructure to redress this economic

imbalance, concerns about overheating have caused

24National Development and Reform Commission of China25Report on the Work of the Government delivered by Premier Wen Jiabao at the Fourth Session of the Tenth National People's Congress, March 5, 200626National Bureau of Statistics of China

- 9 -

Chapter 4

Government-Led Construction

Building up infrastructure in

underserved areas will be the key to

their economic development and in

unlocking their untapped consumer

markets

the central government to place more stringent

controls on infrastructure spending and investment in

recent years.27 With the slowing down of China’s

economy during the financial crisis, this overheating

concern has been removed and both long planned

and new infrastructure projects are being funded.

China has allocated 37.5% of its package, or about

$ 2 2 0 bi l l ion, towards the construction of

infrastructure, focused mainly in transportation. In

addition, most of China’s other stimulus allocations

are also geared towards improving the country’s

infrastructure, albeit targeting more specific types of

projects. For example, the allocation of funds for

post-quake reconstruction represents $146.5 billion

dollars, 25% of the total stimulus, which will go

towards the reconstruction of infrastructure

damaged in the 2008 Sichuan earthquake. The

allocation for protecting the vulnerable involves

building community infrastructure for low-income

citizens. This will include physical infrastructure, such

as building low-cost housing and rehabilitating slums,

and represents $58.6 billion, or 10% of the total

package. Promoting rural development, $54 billion

and 9% of the package, is mainly achieved through

rural engineering projects; these help to support

agricultural projects and public works, such as

improving access to safe drinking water and social

programs for resettling nomads. Even China’s

relatively insignificant allocations towards improving

healthcare and education, each representing $7.3

billion and 1.3% of the package, are likely to spur

construction of new schools and hospitals in

underserved areas.28 While a lack of transparency in

the Chinese package makes tracing the specific

allocations difficult, it is clear that a massive

percentage of the China stimulus, perhaps as much as

80%, i s going towards improving national

infrastructure.

These infrastructure and engineering projects are

long-term endeavors, and it could take years before

they are completed and contributing to rural and

western economic development. In the short term,

however, these projects will promote employment in

rural and western regions, improve standards of living,

and increase buying power by disbursing funds into

local economies. This nation-wide infrastructure push

will create a demand for engineering equipment and

technologies from other countries. Though China has

become one of the world’s major exporters of

engineering equipment, many technologically

- 10 -

27China’s Economy in 2007/8: Coping with the Problems of Secular High Growth, John Wong, EIA Background Brief No. 36428Based on the assumption that education, healthcare, and other social programs share the same amount of allocation out of the smallest broad area of the package totaling $22 billion.292008 Annual Report, XCMG

advanced components still need to be imported. For

example, XCMG, the leading construction machinery

manufacturer in China, made $156 million from

exports in 2008, but spent $34 million importing

foreign parts.29 China’s focus on infrastructure will

form a boon to foreign companies that provide these

items, which will positively affect the economies of

the developed nations where they are based.

0%

1%

2%

3%

4%

5%

6%

7%

With the majority of the stimulus packages yet to be

spent, it is difficult to isolate the impacts of each

package on domestic recovery. In the US, there are

some encouraging trends that suggest that the

economy is beginning to emerge from the crisis. In

July, the IMF improved its forecast for the US

economy from their April estimate of a 2.8%

contraction to a projected 2.6% contraction, a

modest gain but a promising trend. But later in

October, the IMF lowered its forecast for the US

economy’s 2009 performance to a bigger contraction

of 2.7%.30 Consumer confidence has increased to

69.4 in October, an improvement from a low of 55.3

in November of 2008.31

The unemployment rate, while still high at 9.8% in

September, has seen its growth rate flatten over the

past several months. How much of this improvement

can be attributed to the stimulus is still an open

question. With both the US economy and stimulus

package focused on US consumer spending, the

stimulus’ effect on boosting consumption has been

dampened by a sharp increase in the US personal

savings rate.

30World Economic Outlook, International Monetary Foundation, October, 200931University of Michigan

- 11 -

Monthly Change Rate of the Michigan Consumer Sentiment and the US Unemployment Rate

Source: University of Michigan; Tradingeconomics.com

US Personal Saving as a Percentage of Disposable Personal Income

Source: Bea.gov

Jan

2006

July

2006

Jan

2007

July

2007

Jan

2008

July

2008

Jan

2009

July

2009

Chapter 5

Domestic Recovery

0

10

20

30

40

50

60

70

80

July

2008

Sep

2008

Nov

2008

Jan

2009

Mar

2009

May

2009

July

2009

Sep

2009

Co

nsu

me

r Se

nti

me

nt

5%

10%

Un

em

plo

yme

nt R

ate

Michigan Consumer Sentiment Index Unemployment Rate

The situation for China appears brighter. According to

the National Bureau of Statistics in China, in the first

half of 2009 China’s total investment in fixed assets

increased 33.5% year-over-year and GDP increased

7.1% year-over-year. The IMF also revised its growth

projection for China, from its April projection of 6.5%

to 7.5% in July. More recently in October, the IMF

further improved its projection for the China

economy’s growth rate in 2009 to a more

encouraging 8.5%.32 Partially thanks to the

implementation of the country’s $586 billion stimulus

package, the Chinese economy did reasonably well in

the first 6 months of 2009.33

- 12 -

32World Economic Outlook, International Monetary Foundation, October, 200933National Development and Reform Commission of China

To fund all these projects, the central government

mandated a more open approach to lending by

institutions from the People's Bank of China down to

the thousands of local commercial bank branches,

which led to a substantial expansion of credit

throughout the country. Not surprisingly, the June

credit outlay by Chinese banks brought total lending

for the first half of the year to a record $1.08 trillion

(RMB 7.37 trillion), 3 times the amount of loans

issued during the same period last year.

Total Monthly Investment in Fixed Assets in China

Source: Stats.gov.cn

Monthly Credit Outlay of China

Source: People’s Bank of China

0

500

1,000

1,500

2,000

2,500

July

2008

Aug

2008

Sep

2008

Oct

2008

Nov

2008

Dec

2008

Jan&Feb

2009

Mar

2009

Apr

2009

May

2009

June

2009

July

2009

Aug

2009

0%

10%

20%

30%

40%

Total Monthly Investment in Fixed Assets (RMB billion) Fixed Assets Investment Y-O-Y Change

0

500

1,000

1,500

2,000

July

2007

Jan

2008

July

2008

Jan

2009

July

2009

Total Monthly Credit Outlay of China (RMB billion)

In times of crisis, nations historically seek ways to

protect the most vulnerable parts of their economies.

The large amounts of direct government spending in

the US and China stimulus packages create an

environment conducive to protectionism, where

policies are enacted that benefit one country (or an

interest group in that country) at the expense of

others. Despite promises to the contrary, 17 of the

G20 countries have adopted measures that can be

viewed as protectionist, and the US and China are not

exceptions, both having added ‘buy local’ provisions

for their stimulus infrastructure projects.34

The US package allocates $63 billion towards

infrastructure through direct government spending,

spread across a wide variety of transportation

infrastructure projects, including modernizing federal

infrastructure, constructing highways and bridges,

and improving mass transit and railway networks.35

In a free market, this kind of expenditure represents

an opportunity for global suppliers. However, the

desire to keep manufacturing and jobs in the United

States led to the passing of a ‘Buy American’ provision

to the ARRA on February 17, 2009. This provision

requires the use of domestic suppliers for all stimulus

engineering projects. The only exceptions allowed are

if insufficient quality goods are available domestically,

domestic prices are 25% higher than foreign bids, or

the use of domestic goods is not in the national

interest. Due to this requirement, foreign firms are

effectively shut out from the bidding process,

directing the bulk of the US infrastructure stimulus

towards domestic firms.

On the surface, China’s June 4, 2009 decision to add a

‘Buy Chinese’ provision to its stimulus package

appears to be a large step in the direction towards a

protectionist world. According to the provision,

“Government investment projects should buy

domestically made products unless products or

services cannot be obtained in reasonable commercial

conditions in China.” However, our respondents were

in agreement that the ‘Buy Chinese’ provision is a

paper tiger, and does not represent a trend towards

protectionist sentiment. The low costs of domestic

labor and materials mean foreign suppliers are often

not competitive, largely eliminating the influence of

protectionist measures on the bidding process. Most

respondents went a step further, stating that it is

absolutely not in China’s interest to institute

protectionist policies. As a country dependent on

exports, China has everything to gain by promoting a

free economy, and much to lose by adopting

protectionist measures that could slow global

economic integration. It appears that the ‘Buy Chinese’

provision is a form of political protest, retaliation

against the United States and other importing

countries who have adopted protectionist policies of

their own.

While technically protectionism does exist in both

packages, it’s not meaningful in the economic sense,

as the magnitude of this effect should be negligible in

light of the total effects of the stimulus packages.

Despite all the fuss over ‘Buy American,’ at stake is

only a small portion of the US package, and the ‘Buy

Chinese’ provisions are largely empty. The negative

effects of these measures are far outweighed by the

positive trade effects of raising demand and domestic

consumption in the US and China.

34Trade Protection: Incipient but Worrisome Trends, World Bank, March, 200935Based on the assumption that infrastructure and science share the same amount of allocation in the fund allocated for the two categories totaling $126 billion.

- 13 -

Chapter 6

Protectionism in the Packages

The magnitude of these positive effects on global

recovery can be estimated by looking at each

country’s marginal propensity to import, or MPI,

which represents the percentage of GDP growth that

is spent on imported goods. Based on regression

analysis of imports and GDP between 1985 and 2008,

we calculated China’s historical MPI to be 0.3149,

meaning that for every dollar of GDP growth, $0.3149

will be spent on imports. Researchers at Xi’an

Jiaotong University analyzed the effect of China’s

stimulus package on China’s GDP, and calculated that

the stimulus would increase China’s GDP by $944.6

billion.36

Based upon historical MPI data, we expect this GDP

increase to translate into a $298.0 billion increase in

imports. Likewise, our analysis of historical (from

1985 to 2008) GDP and import data in the US resulted

in a calculated MPI of 0.2029. Based upon the

Congressional Budget Office’s estimate that the US

stimulus, in a best scenario, will lead to a 9.5% total

increase to GDP, resulting in a net increase of $1.35

trillion, the stimulus is expected to drive $274.9

billion of imports.37 Together, the US and China

stimulus packages are expected to drive $572.9

billion in imports. Should the stimulus packages

perform as projected, they will have a very large

positive effect on promoting international trade and

will assist the economic recovery of exporting nations.

- 14 -

36Calculation of the Pulling Effect of the RMB Four-Trillion Plan on the Chinese Economy, Guo Ju’e, Guo Guangtao, Meng Lei, Xue Yong, December, 200837Year-by-year Estimate of the Economic Effects of the American Recovery and Reinvestment Act of 2009, U.S. Congressional Budget Office, March, 2009

Chapter 7

Matters of Great Import

Together, the US and China stimulus

packages are expected to drive

$572.9 billion in imports

- 15 -

38Based on the assumption that infrastructure and science share the same amount of allocation in the fund allocated for the two categories totaling $126 billion.39Ministry of Commerce of China40Based on the assumption that infrastructure and science share the same amount of allocation in the fund allocated for the two categories totaling $126 billion.

Technology has long been a key driver of economic

growth, allowing countries to create and realize

value-added products and services. Recognizing this

economic importance, both China and the US made

significant allocations towards promoting technology

sectors, representing 14.5% and 16.3% of their

respective packages.38 For both countries, this

allocation is split between promoting technological

advancement and sustainable development. In terms

of allocations towards scientific advancement, the

packages of each country are representative of their

current needs. The Chinese package is mainly geared

at upgrading Chinese manufacturing infrastructure,

following the 11th Five Year Plan goal of upgrading

China’s industrial structures. Much of the

manufacturing technology introduced to China from

abroad twenty to thirty years ago is now at the end of

its lifecycle and needs to be replaced and upgraded.

Following goals outlined through the Chinese

government’s latest development blueprint, China

has allocated 9% of its package, $54 billion, in order

to shift manufacturing away from export-oriented

and labor-intensive growth models and towards high-

end production. Much of the technology required for

this transition is expected to be imported from

abroad; indeed, advanced electronics and machinery

already represent 20% of China’s total import value.39

Imports of manufacturing equipment and technology

transfer are expected to have a positive effect on

global recovery, by supporting job growth in

countries that are key suppliers of advanced

technology, such as the European Union, Japan, and

the United States.

Indeed, the US stimulus allocations towards science

and technology are designed to reinforce the United

States’ leading position as a technological innovator.

Approximately $63 billion is being invested

to maintain the US leading edge in science and

technology, representing 8% of the US package.40

This money will be spent on putting scientists to work

looking for the next great discovery, creating jobs in

cutting-edge industries, and making smart

investments, such as broadband infrastructure, that

will help American businesses succeed in the global

economy.

One area which also might contribute to the global

recovery is sustainable development and new energy.

China has devoted 5.3% of its package, or $30.8 billion,

towards promoting energy saving techniques, cutting

emissions, and environmental engineering projects.

Environmental sustainability has been a long-time

concern of China due to the increasing environmental

impact of its development, and promoting an

environmentally friendly society is another key aspect

of the 11th Five Year Plan. While there is some

concern that other stimulus money could go to

environmentally harmful industries, the situation for

sustainable development in China looks hopeful. The

stimulus allocations for green technology reaffirm

China’s commitment to the environment and its

recognition of the importance of sustainable

development to its economic future. This focus should

drive imports of clean technology from advanced

economies such as the European Union and the

United States, who are the main creators and

innovators in this field.

Similarly, the United States is also promoting

sustainable development and has devoted $65 billion,

8.3% of its package, towards this goal. Most of the US

sustainable energy allocations are for promoting

renewable energy, in which the United States has two

main objectives. While environmental protection is a

key driver, weaning the US from its reliance on foreign

Chapter 8

Technology and Sustainable Development

oil has been influential in shaping the policy. However,

clean energy technologies such as solar photovoltaics,

light-emitting diode lighting, and wind turbines all

rely on strategic metals that are primarily imported

from Africa, China, and Russia. Solar photovoltaic

technology, for example, requires cadmium, tellurium,

indium, gallium, germanium, and silicon; the US is

completely dependent on foreign gallium and indium,

and is 80% dependent on imported germanium.

While the US may seek to decrease its reliance on the

Middle East, its economy will become increasingly

integrated with these suppliers of strategic metals

and minerals. The trade that this will drive will make

positive contributions to global economic recovery.

Both the US and China are stressing the importance

of sustainable development, and allocating funds in

this regard through their packages. Chinese imports

of green technology, and US imports of strategic

metals necessary for the development of clean

energy, should drive integration between the two

economies. This economic interdependence, as well

as aligned policy objectives, could form the

foundation for enhanced cooperation and

coordination between the United States and China in

the environmental field.

- 16 -

Examining both the US and Chinese packages, it

becomes clear that their responses to the crisis

address the specific needs of each economy. The

United States, facing a meltdown in its financial

system and being a consumer-driven economy, took

emergency measures to shore up its financial system

and focused its stimulus package on promoting

domestic consumption. China, a developing nation

whose financial system escaped the crisis intact,

focused its stimulus on providing infrastructure in line

with the 11th Five Year Plan that will aid the country’s

long term growth. As the needs and responses of the

two countries are fundamentally different, it is

difficult to directly compare their efficacies in bringing

about domestic recovery. However, we were able to

analyze the two packages potential effects on

promoting recovery through international trade, and

their influence in shaping the post crisis world.

Aspects of both packages should have the effect of

promoting international trade, which is expected to

contribute to global economic recovery. Despite

some protectionist sentiment, its influence is

expected to be limited and should not form a lasting

trend. We expect this short term, negative influence

on international trade to be outweighed by the trade

that is promoted by various aspects of the two

packages, such as imports driven by American

consumers who are provided with more money in

their pockets as a result of boosts to domestic

consumption. Additional ly, China’s massive

infrastructure push is expected to drive demand for

imported engineering and manufacturing equipment

and technology, providing a boost for economies that

export these goods. Finally, the focus on sustainable

development by both packages creates further

opportunities for trade in strategic metals and green

technology.

Looking to the post-recovery world, the influences of

the two packages are likely to have marked

differences. These are mainly due to the unique

dynamics of the US and Chinese economies, and the

mechanisms needed to address their individual

recoveries. The United States is a developed economy,

driven by consumption and already possessing basic

infrastructure. Its stimulus package reflects those

conditions, and seeks to boost domestic consumption

over a two year period in order to provide a jumpstart

to the economy. While some investment is being

made into funding infrastructure and technological

innovation, the bulk of the US package is geared

towards the short term and its potential dividends are

largely limited to setting the US economy on its pre-

crisis track. Post recovery, the US economy will still

embody the same basic dynamics as it did pre-crisis,

albeit with a hopefully better regulated financial

sector.

The situation is very different in China, whose

economic growth is export and investment driven,

and whose national economic infrastructure is not yet

mature. It becomes apparent that the financial crisis

has provided unexpected opportunities for China’s

development and emergence on the international

stage. China’s stimulus allocations have not been

reactionary, instead being consistent with

development goals laid out by the 11th Five Year Plan.

The vast majority of stimulus funds have gone

towards projects designed to bring about “concordant

development among regions,” “upgrade industrial

structures” and build a “conservation minded and

environmentally friendly society.” While these have all

been policy goals for the past several years, they have

received relatively small amounts of direct funding

from the central government. In 2008, for example,

rural construction received 2.4% of the central

- 17 -

Chapter 9

Initiative in Crisis

government’s budget allocations, transportation 7.8%

(not limited to infrastructure), and post-quake

reconstruction only 0.5%.41 Indeed, overheating

concerns over the past several years have caused the

government to restrict public and private investment

in these key areas. The slowing down of the Chinese

economy and diminished overheating concerns due

to the financial crisis has provided an opportunity for

China to fund these long term growth programs. The

infrastructure-related spending of the package,

approximately RMB 3.26 trillion, is over 20 times

larger than the yearly infrastructure-related spending

in China’s 2009 central government budget. Using the

massive amount of money injected by the stimulus,

China is able to dramatically accelerate these

development goals and lay the foundation for

upgrading its economy.

Promoting western and rural development and

allowing China’s underserved consumer markets to

reach their potential is only one part of the equation.

The stimulus allocations towards upgrading China’s

industrial structure and implementing sustainable

development will also aid China’s transition to higher

value goods and services. By importing foreign

industrial machinery to upgrade its aging industrial

infrastructure, and stressing technology transfer in

manufacturing and sustainable development, Chinese

industry can shift gears from basic production

towards higher-value added production and

innovation. Doing so will allow Chinese industry to

begin focusing on value propositions other than cost.

As companies begin to offer higher quality goods,

they can start differentiating themselves and

developing the innovative products required for a

mature brand to capture more of the value chain, and

transition from ‘Made in China’ to ‘Created in China’.

The opportunity for China to upgrade its economy

could not be coming at a better time. Not only has

the financial crisis offered China opportunities to

hasten its own domestic development plans, it has

also launched it into a position of greater prominence

in the global financial system. The near collapse of the

US financial system has raised doubts about the

wisdom of using the US dollar as the main reserve

currency, and the high deficit spending of the US on

its recovery packages has raised fears of inflation.

China has been especially concerned about US dollar

stability as it is the world’s largest holder of dollar-

denominated monetary instruments, as evidenced by

Premier Wenjiabao and People’s Bank of China

Central Governor Zhou Xiaocun March 2009

- 18 -

41Ministry of Finance of China42Wall Street Journal43Xinhua News Agency

criticisms of the dollar’s paramount status.

In the wake of the crisis, China has taken numerous

steps towards promoting internationalization of the

Yuan: negotiating currency swap agreements with

central banks in various countries worth a total of

RMB 650 billion, boosting its gold reserves, and using

the Chinese Yuan as a clearance currency for

international trade.42 Additionally, the issuance of

RMB 6 billion ($878.5 million) in bonds in Hong Kong

in September was a major step towards promoting

the Yuan as an international currency.43 It seems that

China may be serious in moving towards making the

Yuan freely-convertible, a necessary step if it seeks to

transform it into an international reserve currency

and Shanghai into an international financial center.

For the United States and most of the world, the

financial crisis dealt a severe blow to economic

development and required governments to take

emergency action in order to prevent economic

collapse. For China, however, the crisis has been

more akin to an opportunity. Like the United States,

China has taken steps to promote a slowing economy

through stimulus measures; while both packages are

targeted at domestic recovery, aspects of both

packages are also expected drive international trade

which can help bring about global recovery. However,

with its financial system intact and its economy still

growing, China has been able to focus on promoting

long term growth rather than on reactionary rescue

and recovery programs. The economic slowdown

made it possible to fund a slew of infrastructure

projects that will accelerate the upgrading of China’s

economy. This transition to ‘Created in China’ is

complimented by what is shaping up to be an

accelerated emergence of China in the world financial

system. Through taking advantage of the

opportunities provided by the financial crisis, we

expect China to take on an expedited new role in the

global economy in the years to come.

We analyzed both the broad implications of the two

packages, as well as the specific trade effects of

particular allocations. To help our analysis of the US

and Chinese packages, we re-categorized the stimulus

allocations into 10 comparable sectors. Our analysis is

largely based upon secondary research based on facts

collected from related official websites and data

sources. Our data sources have been cited

throughout the paper using footnotes.

Our qualitative analysis is also based on a survey of

China Institute Executive Summit attendees to

provide expert insight about the financial crisis and

where the financial crisis will lead us. The survey was

conducted using various methodologies, including

face-to-face interviews, telephone interviews, and an

online questionnaire. We’ve successfully collected

insights into six open questions regarding specific

topics, such as Sino-US cooperation, sustainable

development, etc. For breakdowns of relevant survey

responses, please see Appendix II.

Apart from qualitative analysis, we also conducted

quantitative analysis, studying the marginal

propensity to import of the US and China economies,

in an effort to gauge the amount of increase in

imports as a result of the stimulus packages. For a

detailed explanation of our qualitative analysis,

please see Appendix III.

- 19 -

Appendix I

General Methodology

- 20 -

How Appropriate are the Fund Allocations for the US

Package?

No Comment,

15%

Not

Appropriate,

54%

Appropriate,

31%

How Appropriate are the Fund Allocations for the

China Package?

Appropriate,

54%Not

Appropriate,

38%

No

Comment,

8%

Effects of the US Stimulus on Sustainable

Development

Inhibition,

42%

Stimulation,

58%

Effects of China’s Stimulus on Sustainable

Development

Stimulation,

73%

Inhibition,

27%

Appendix II

Survey Results

- 21 -

Marginal Propensity to Import (MPI) refers to the

change in import expenditure that occurs with a

change in GDP.

MPI = dI / dY

According to the increment in dY (i.e. change in GDP)

and MPI , we can calculate the change in import.

Take China for example. Linear regression based on

import and GDP data from 1985 to 2008 gives (go to

Table of Linear Regression)

I = 0.3149 * GDP – 82.1112

Where the constant coefficient is: MPI

MPI = 0.3149

According to the estimates of researchers Guo Ju‘e,

Guo Guangtao, Meng Lei, Xue Yong, at Xi’an Jiaotong

University, China’s $587 billion (RMB 4 trillion)

stimulus package will push up China’s GDP by $946.2

billion (RMB 6.4478 trillion).

According to MPI formula, we get

dI = 0.3149 * 946.2 = 297.96 Billion

The ration of increase in import to the size of the

China package is

g = dI / SP = 297.96 / 587 = 50.76%

Similarly, linear regression analysis based on import

and GDP value of the United States from 1985 to

2008 gives MPI = 0.2029 (go to Table of Linear

Regression). In regard to the pulling effect of US’s

stimulus package on US economy, the Congressional

Budget Office of the US released its estimate of the

economic effects of the American Recovery and

Reinvestment Act of 2009 (ARRA, Public Law 111-5)

on March 2, 2009. According to their estimates,

totally 9.5% increase of GDP will be brought about by

the US package. Based on this as well as the US GDP

in 2008 (that is $14.26 trillion), we can calculate the

overall increase of GDP caused by stimulus packages

is $1.3547 Trillion.

According to MPI formula, we get

dI = 0.2029 * 1354.7 = 274.87 Billion

The ration of increase in import to the size of the US

package is

g = dI / SP = 274.87 / 787 = 34.93%

Appendix III

Calculations for Estimating the US and China

Packages’ Effects on Imports

- 22 -

USA China

Import GDP Import GDP

1985 411.0 4,187.5 38.2 304.9

1986 448.6 4,427.7 34.9 295.7

1987 500.6 4,702.1 36.4 268.2

1988 545.7 5,063.9 46.4 307.2

1989 580.1 5,441.7 48.8 342.3

1990 616.1 5,757.2 42.4 354.6

1991 609.5 5,946.9 50.2 376.6

1992 656.1 6,286.8 64.4 418.2

1993 713.2 6,604.3 86.3 440.5

1994 801.7 7,017.5 95.3 559.2

1995 890.8 7,342.3 110.1 728.0

1996 955.7 7,762.3 131.5 856.1

1997 1,042.7 8,250.9 164.4 952.7

1998 1,099.3 8,694.6 163.6 1,019.5

1999 1,231.0 9,216.2 190.3 1,083.3

2000 1,450.4 9,764.8 250.7 1,198.5

2001 1,370.4 10,075.9 271.3 1,324.8

2002 1,399.1 10,417.6 328.0 1,453.8

2003 1,515.2 10,918.5 448.9 1,641.0

2004 1,769.2 11,679.2 606.5 1,931.7

2005 1,996.7 12,416.5 712.1 2,243.9

2006 2,212.0 13,201.8 852.8 2,668.1

2007 2,344.6 13,807.5 1,034.7 3,430.1

2008 2,522.5 14,264.6 1,232.8 4,421.6

Note: “Import” includes both products and services

Source: State Administration of Foreign Exchange of China; National Bureau of Statistics of China; U.S. Census Bureau

Source Data for the Linear Regression

$, billion

Regression Result:

China:

Imports = 0.3149*GDP - 82.1112, MPI=0.3149

USA:

Imports = 0.2029*GDP - 565.0564, MPI=0.2029