SmithStreetSolutions has broken down the US and China stimulus packages into ten spending categories in order to compare and analyze their effects. Our research shows that both packages will help bring global recovery by promoting trade. Additionally, China has seized the opportunity to use its package to advance two key long-term development goals, upgrading manufacturing and opening up its rural and western markets, that are critical milestones in the transition from ‘Made in China’ to ‘Created in China’.

2. Copyright 2009 SmithStreetSolutions. All rights reserved.

5. Chapter 1
Introduction
When the New Century Financial Corporation was Organization projects the global unemployment rate
delisted from the New York Stock Exchange on March to be between 6.5% and 7.4% by the end of 2009,
13, 2007 and entered bankruptcy less than three compared with 6.0% in 2008 and 5.7% in 2007.3 A
weeks later, few thought this event was the harbinger report by the World Bank on June 22, 2009 estimated
of a global economic crisis. However, what began as a that the global economy would contract by 2.9% in
problem caused by bad subprime mortgages spread 2009 compared to growth of 3.8% in 2007 and 1.9%
like a virus throughout the American financial system. in 2008. While perhaps the largest impact of the crisis
As the housing market plummeted, financial has been on the developed economies most
institutions watched the veil of security fall away connected to the US financial system, the developing
from years of irresponsible lending based upon the world has also been adversely affected. Developing
expectation of its continuous growth. In 2008, the US economies watched their growth rates shrink from
investment banking industry was decimated by the 8.1% in 2007 to 5.9% in 2008 and to a projected 1.2%
collapse of two of the largest investment banks, Bear in 2009.4
Stearns and Lehman Brothers, the acquisition of
Of particular interest is the effect of the financial
Merrill Lynch by Bank of America, and the transition
crisis on China, whose economy has become
of Goldman Sachs and Morgan Stanley from
increasingly intertwined with that of the United
investment banks into bank holding companies. As
States. The links between the world’s largest
the American financial system was thrown into
economy and the largest developing economy, which
turmoil, lending came to a halt and the effects of this
also represent the largest import and 2nd largest
financial crisis were felt throughout the global
export markets respectively, are profound and
economy and financial system. The impact has been
complex. With China-U.S. bilateral trade valued at
profound, and the US is still experiencing its effects.
$409 billion in 2008, the US is China’s largest trade
The economy went into recession and unemployment
partner, meaning that changes to demand in the US
rates skyrocketed, reaching 9.8% in September 2009.1
have massi v e effe c ts on Chi na’s exports. 5
Consumer spending, a key engine of the United States’
Furthermore, China’s substantial holdings of US
economic growth, decreased significantly in the wake
dollars (representing an estimated 70% of China’s
of the crisis; auto sales hit a 27 year low in January
$2.27 trillion foreign exchange reserve) and Treasury
2009, and the consumer confidence index fell from
bills ($800 billion) tie China’s economic fortunes to
over 70 in September 2008 to only 55.3 in November
the stability of the dollar.6 The closeness of this
of that year.2 The American economy had not faced
economic relationship has become increasingly
such a crisis since the Great Depression in the 1930s.
evident as China has felt the repercussions of the
The decline of the US financial system and economy crisis. Growth rates have decreased remarkably, from
was not isolated, and has had massive effects on a healthy 13.0% in 2007, before the crisis, to a
today’s integrated global economy. Unemployment projected 8.5% in 2009.7 More noticeably, urban
rates increased throughout the world, as a result of unemployment stood at 4.3% for the first two
layoffs and hiring freezes. The International Labor quarters of 2009, and has disproportionally affected
1U.S. Bureau of Labor Statistics
2University of Michigan
3
International Labor Organization
4Global Development Finance 2009, World Bank
5USChina.org
6
State Administration of Foreign Exchange of China; U.S. Department of the Treasury
7World Economic Outlook, International Monetary Foundation, October, 2009
-1-

6. graduating college students, among whom the and a stalled economy due to curtailed consumer
unemployment rate is 32% as of July 1, 2009.8 The spending, targeted its stimulus at promoting
consumer confidence index published by the National domestic consumption. China, a developing country
Bureau of Statistics is down as well, reaching the and largely insulated from the global financial crisis,
comparably low level of 88.0 in August 2009, utilized the slowdown as an opportunity to accelerate
compared to 93.7 one year ago.9 While China’s its long term development goals to promote lagging
economy still continues to grow, its leadership is rural and western development and upgrade
understandably worried about the country’s ability to industrial infrastructure. The slowdown created by
maintain the robust economic growth that the the crisis created a significant opportunity to advance
Chinese people have come to expect. these goals, as the necessary investments and
government expenditure had been withheld due to
In the wake of the financial crisis, governments
overheating concerns over the past few years. At this
around the world have taken steps towards both
point, it is still too early too judge the efficacy of each
economic rescue and recovery. Countries have
stimulus package in promoting recovery, as most
understandingly looked to their own domestic needs,
funds have yet to be disbursed. However, we expect
through disbursing funds to address vulnerable
both packages to have a positive contribution
aspects of their economies and to protect those
towards global economic recovery by promoting
industries bearing the brunt of the downturn. One of
international trade. Boosts in domestic consumption,
the primary lessons of the crisis has been the reality
especially in the US, and China’s need for imported
of globalization: changes to a nation’s economy have
machinery and technology should drive international
the potential to reverberate throughout the entire
trade that will promote the recoveries of the
global system. Given the importance of the United
countries involved.
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
recovery. Following up on the summit,
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
8
National Bureau of Statistics of China; Ministry of Human Resource and Social Security of China
9NationalBureau of Statistics of China
-2-

7. Chapter 2
Packaging Recovery
In the wake of the financial crisis, both the US and purchase asset-backed securities collateralized by
China undertook measures to promote their own student, auto, credit card, or small business loans.
independent recoveries. In the United States, the Initially budgeted at $200 billion, the program has
initial actions taken in response to the crisis were expanded to over $1 trillion in lending from the
economic rescue measures to stabilize the economy. Federal Reserve Bank of New York. While both TARP
The immediate problem at hand was the US financial and TALF represent significant measures to counter
system, whose dramatically scaled back lending was the financial crisis, their focus was on stabilizing the
harming the economy and causing the usual Federal US financial system.
Reserve economic controls to be ineffective. On
On February 17, 2009, US President Barack Obama
October 3, 2008, Congress passed the Emergency
signed the American Recovery and Reinvestment Act
Economic Stabilization Act of 2008 (EESA), with the
(ARRA), commonly known as the US economic
goal of restoring liquidity and stability to the financial
stimulus package. The bill included a total of $787.2
system of the United States.
billion (5.5% of the 2008 US GDP) in government
The fundamental component of this act was the allocations, the vast majority of which is to be used to
Troubled Asset Relief Program (TARP), which broadly save US jobs and jumpstart the economy.10
authorized the Secretary of the Treasury to buy Proponents of the bill claim it will save 3 to 4 million
troubled assets. Initially budgeted at $350 billion, the American jobs and the strict accountability measures
TARP program was expanded by Congress to $700 built into the bill will ensure responsible distribution
billion in January 2009. A number of programs and use of funds. As of October 13, 2009, $288 billion
targeting different areas of the US financial system of these funds had been made available to Federal
were created under TARP, including aid to agencies and $116 billion (15% of the total allocation)
homeowners, financing for US auto manufacturers, had been spent.11
and government investment into financial institutions
Social welfare provisions provided the lion’s share of
to help promote lending. This third program, the
the stimulus, with individual tax relief and state and
Capital Purchase Program, allowed the government
local fiscal relief forming over half of the total
to purchase senior preferred shares in financial
package. Other significant allocations went towards
institutions and was budgeted for $250 billion. Nearly
infrastructure, scientific R&D, and the US healthcare
a year into the program, the emergency ‘bailout’
and education systems. Also included in the package
nature of the Capital Purchase Program is becoming
were a number of non-recovery related items that
apparent, as many banks are choosing to exit the
were part of long term plans or were otherwise
program as soon as it is economically sound to do so.
desired by Congress. In order to pay for the bill, US
Also tied to the EESA was the Termed Asset-backed government spending is expected to surge, increasing
Loan Facility, or TALF, to promote consumer and the US federal deficit, trade deficit, and the global
business loans and restore liquidity to the financial supply of US dollars.
system. Under this program, the Federal Reserve
provides loans to financial institutions in order to
10
Recovery.gov; CIA World Factbook
11Recovery.gov
-3-

8. Breakdown of the US Economic Stimulus Package12 Breakdown of the China Economic Stimulus Package14
$ Bn $ Bn
Healthcare,
Other Social Education, Other Social
7
Programs, 7 Programs,
8 Sustainable 7
Development,
Science, 31
63
Tax Relief, Rural
Infrastructure,
213 Development,
63
54
Energy, Technology
65 Infrastructure,
Advancement,
220
54
Healthcare, Protecting the
107 Protecting the
Vulnerable,
Vulnerable,
59
Education & 142 Post-Quake
Training, Reconstruction,
126 147
Total = $787 billion Total = $586 billion
Source: Recovery.gov Source: Sdpc.gov.cn
The US stimulus package was fairly divisive among our significant funds also going towards rural
respondents, with 54% believing that it was not development, technological advancement,
appropriate given the global context of the financial sustainable development, and other forms of social
crisis, and could be improved. Many voiced similar welfare. In March 2009, the package allocations were
objections to those of the bill’s opponents in amended by the National People’s Congress. This did
Congress, namely that the bill represented excessive not alter the total size of the package, but funds were
government intervention that will harm the free rechanneled towards expediting crucial social welfare,
market economy in the long run. However, the rural development projects, and public works.
majority of our survey participants felt that the US
Shortly after announcing the package, the national
stimulus package addressed the key US needs to
government revealed that it would only be supplying
boost consumer confidence and domestic
$173 billion (RMB 1.18 trillion) of the stimulus funds,
consumption, crucial ingredients for the recovery of
with the remainder expected from local governments
the US economy.
and the private sector. To help local governments
Compared to the US, the effects of the financial crisis finance their share, the central government is issuing
on China have been less severe. While the growth bonds for the local governments, and the debt of
rate of the economy slowed, China never entered these bonds will be transferred to their deficits. The
recession. On November 5, 2008, Premier Wen Jiabao reliance upon local governments and private
called a meeting of the State Council Standing businesses raised some doubts about the efficacy of
Committee to create a plan to boost domestic the plan, as some consider these sources of funding
demand and maintain the momentum of the rapidly to be unreliable, due to the poor cash situation of
growing Chinese economy. By November 9, the many local governments and doubts about the
stimulus initiatives and the total size of the package willingness of private participation. Most of the
were announced, and the specific allocations were purely public projects will be completely funded by
released by the National Development and Reform the central government, and the government will
Commission on November 27. The Chinese stimulus partner with the private sector for semi-public
package includes $586 billion (RMB 4 trillion, 13.3% of projects. Importantly, many of these latter
the country’s 2008 GDP) in allocations aimed towards infrastructure projects are expected to be profitable,
a wide variety of projects.13 Infrastructure projects increasing the likelihood that private businesses will
and reconstruction from the 2008 Sichuan be willing participants. By the end of October 2009,
earthquake represented the largest allocations, with $80.46 billion (RMB 550 billion, 13.8% of the total
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.)
13
National Development and Reform Commission of China; CIA World Factbook
14Based 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.
-4-

9. Comparison of the US and China Economic Stimulus Packages
The US Package The China Package
Amount % of Amount
No. Category Where the Money Is Going % of Total Where the Money Is Going
($ Bn) Total ($ Bn)
Funds for social safety net programs, Social welfare plans, including
Protecting the such as welfare, food stamps, child low-cost housing, rehabilitation
1 142 18.0% 59 10.0%
Vulnerable support, and other forms of of slums, and other social safety
assistance net projects
Improving the quality of American
Education &
2 126 16.0% education and making it more 7 1.3% Educational Programs
Training
accessible to the underprivileged
Offsetting rising medical expenses
3 Healthcare 107 13.6% and rescuing the ailing Medicare 7 1.3% Healthcare Programs
system
Energy Promoting sustainable development, Promoting energy saving, cutting
4 (Sustainable 65 8.3% largely through developing new 31 5.3% emissions, and environmental
Development) energy engineering projects
A wide variety of transportation and Construction of infrastructure,
5 Infrastructure 63 8.0% 220 37.5%
federal infrastructure projects mainly in transportation
Science Reinforcing the United States’
Transforming manufacturing
6 (Technology 63 8.0% leading position as a technological 54 9.3%
towards high-end production
Advancement) innovator
Other Social
7 8 1.0% - 7 1.3% -
Programs
Tax Relief and Recovery tax cuts for various
8 213 27.1% - 0.0% -
Other purposes
Post-Quake Reconstruction projects for the
9 - 0.0% - 147 25.0%
Reconstruction May 2008 Sichuan earthquake
Building public amenities,
Rural
10 - 0.0% - 54 9.3% providing safe drinking water,
Development
etc.
Total 787 100.0% - 586 100.0% -
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
allocation) has been paid out by the central developed areas in the west and countryside. Given
government, the majority of which is going towards the large disparities in income and industrial
rural development, public infrastructure, and social development between the eastern seaboard and the
welfare projects.15 interior, efforts to improve this infrastructure in
particular will be a key to China’s long term economic
When asked about the efficacy of the China economic
success.
stimulus package, a slight majority of our respondents
believed the allocations were appropriate. One When comparing the two stimulus packages, it
common criticism was that the package did not place becomes clear that similarities between the two
enough emphasis upon promoting consumption in packages regarding areas of fund allocations exist
order to boost domestic demand. However, many of only on the surface. Both the US and Chinese
the experts applauded the focus on infrastructure economies are fundamentally different, have been
development, which increases government spending effected by the financial crisis in differing ways, and
while promoting the long term growth of China’s less require stimulus packages catering to their individual
15National Development and Reform Commission of China
-5-

10. 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.
16
Economist Intelligence Unit
17EmergingEast Asia - A Regional Economic Update, Asia Regional Integration Center, July, 2009
-6-

11. Chapter 3
Consumer Nation
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, The US package places a large
and other forms of economic assistance initiatives. emphasis on domestic consumption
The US has allocated $61 billion in tax relief
specifically for low income households. The bulk of in order to jumpstart the engine of
the additional $213 billion tax relief goes towards recovery
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
18
Economist Intelligence Unit
19Based
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-

12. 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 Increases to domestic consumption
outlays go towards local school districts, in order to
allow them to avoid cutbacks in services and teaching are expected to drive demand for
staff, and allow them to offer modern classrooms to imports, which make up 44% of all
their students. While all of these have the primary
goal of providing a quality education system, they will
consumer goods sold in the US
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.
20Families USA
21U.S. National Coalition on Health Care
22
Based 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
-8-

13. Chapter 4
Government-Led Construction
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 Building up infrastructure in
domestic consumption market, China’s rural and underserved areas will be the key to
western consumer markets are a long way from
reaching their potential. The development of these
their economic development and in
regions lags far behind China’s coastal areas and unlocking their untapped consumer
urban centers, and poor transportation connections markets
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 China
25
Report on the Work of the Government delivered by Premier Wen Jiabao at the Fourth Session of the Tenth National People's Congress, March 5, 2006
26National
Bureau of Statistics of China
-9-

14. the central government to place more stringent advanced components still need to be imported. For
controls on infrastructure spending and investment in example, XCMG, the leading construction machinery
recent years.27 With the slowing down of China’s manufacturer in China, made $156 million from
economy during the financial crisis, this overheating exports in 2008, but spent $34 million importing
concern has been removed and both long planned foreign parts.29 China’s focus on infrastructure will
and new infrastructure projects are being funded. form a boon to foreign companies that provide these
items, which will positively affect the economies of
China has allocated 37.5% of its package, or about
the developed nations where they are based.
$ 2 2 0 bil li on, towards th e cons truc ti on 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
8 0%, i s goi ng towards i mprovi ng nati onal
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
27China’s
Economy in 2007/8: Coping with the Problems of Secular High Growth, John Wong, EIA Background Brief No. 364
28
Based 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.
292008Annual Report, XCMG
- 10 -

16. Chapter 5
Domestic Recovery
With the majority of the stimulus packages yet to be 69.4 in October, an improvement from a low of 55.3
spent, it is difficult to isolate the impacts of each in November of 2008.31
package on domestic recovery. In the US, there are
The unemployment rate, while still high at 9.8% in
some encouraging trends that suggest that the
September, has seen its growth rate flatten over the
economy is beginning to emerge from the crisis. In
past several months. How much of this improvement
July, the IMF improved its forecast for the US
can be attributed to the stimulus is still an open
economy from their April estimate of a 2.8%
question. With both the US economy and stimulus
contraction to a projected 2.6% contraction, a
package focused on US consumer spending, the
modest gain but a promising trend. But later in
stimulus’ effect on boosting consumption has been
October, the IMF lowered its forecast for the US
dampened by a sharp increase in the US personal
economy’s 2009 performance to a bigger contraction
savings rate.
of 2.7%.30 Consumer confidence has increased to
Monthly Change Rate of the Michigan Consumer Sentiment and the US Unemployment Rate
80 10%
70
Unemployment Rate
Consumer Sentiment
60
50
40
30
20
10
0 5%
July Sep Nov Jan Mar May July Sep
2008 2008 2008 2009 2009 2009 2009 2009
Michigan Consumer Sentiment Index Unemployment Rate
Source: University of Michigan; Tradingeconomics.com
US Personal Saving as a Percentage of Disposable Personal Income
7%
6%
5%
4%
3%
2%
1%
0%
Jan July Jan July Jan July Jan July
2006 2006 2007 2007 2008 2008 2009 2009
Source: Bea.gov
30
World Economic Outlook, International Monetary Foundation, October, 2009
31University of Michigan
- 11 -

17. The situation for China appears brighter. According to To fund all these projects, the central government
the National Bureau of Statistics in China, in the first mandated a more open approach to lending by
half of 2009 China’s total investment in fixed assets institutions from the People's Bank of China down to
increased 33.5% year-over-year and GDP increased the thousands of local commercial bank branches,
7.1% year-over-year. The IMF also revised its growth which led to a substantial expansion of credit
projection for China, from its April projection of 6.5% throughout the country. Not surprisingly, the June
to 7.5% in July. More recently in October, the IMF credit outlay by Chinese banks brought total lending
further improved its projection for the China for the first half of the year to a record $1.08 trillion
economy’s growth rate in 2009 to a more (RMB 7.37 trillion), 3 times the amount of loans
encouraging 8.5%.32 Partially thanks to the issued during the same period last year.
implementation of the country’s $586 billion stimulus
package, the Chinese economy did reasonably well in
the first 6 months of 2009.33
Total Monthly Investment in Fixed Assets in China
2,500 40%
2,000
30%
1,500
20%
1,000
10%
500
0 0%
July Aug Sep Oct Nov Dec Jan&Feb Mar Apr May June July Aug
2008 2008 2008 2008 2008 2008 2009 2009 2009 2009 2009 2009 2009
Total Monthly Investment in Fixed Assets (RMB billion) Fixed Assets Investment Y-O-Y Change
Source: Stats.gov.cn
Monthly Credit Outlay of China
2,000
1,500
1,000
500
0
July Jan July Jan July
2007 2008 2008 2009 2009
Total Monthly Credit Outlay of China (RMB billion)
Source: People’s Bank of China
32
World Economic Outlook, International Monetary Foundation, October, 2009
33National
Development and Reform Commission of China
- 12 -

18. Chapter 6
Protectionism in the Packages
In times of crisis, nations historically seek ways to “Government investment projects should buy
protect the most vulnerable parts of their economies. domestically made products unless products or
The large amounts of direct government spending in services cannot be obtained in reasonable commercial
the US and China stimulus packages create an conditions in China.” However, our respondents were
environment conducive to protectionism, where in agreement that the ‘Buy Chinese’ provision is a
policies are enacted that benefit one country (or an paper tiger, and does not represent a trend towards
interest group in that country) at the expense of protectionist sentiment. The low costs of domestic
others. Despite promises to the contrary, 17 of the labor and materials mean foreign suppliers are often
G20 countries have adopted measures that can be not competitive, largely eliminating the influence of
viewed as protectionist, and the US and China are not protectionist measures on the bidding process. Most
exceptions, both having added ‘buy local’ provisions respondents went a step further, stating that it is
for their stimulus infrastructure projects.34 absolutely not in China’s interest to institute
protectionist policies. As a country dependent on
The US package allocates $63 billion towards
exports, China has everything to gain by promoting a
infrastructure through direct government spending,
free economy, and much to lose by adopting
spread across a wide variety of transportation
protectionist measures that could slow global
infrastructure projects, including modernizing federal
economic integration. It appears that the ‘Buy Chinese’
infrastructure, constructing highways and bridges,
provision is a form of political protest, retaliation
and improving mass transit and railway networks.35
against the United States and other importing
In a free market, this kind of expenditure represents
countries who have adopted protectionist policies of
an opportunity for global suppliers. However, the
their own.
desire to keep manufacturing and jobs in the United
States led to the passing of a ‘Buy American’ provision While technically protectionism does exist in both
to the ARRA on February 17, 2009. This provision packages, it’s not meaningful in the economic sense,
requires the use of domestic suppliers for all stimulus as the magnitude of this effect should be negligible in
engineering projects. The only exceptions allowed are light of the total effects of the stimulus packages.
if insufficient quality goods are available domestically, Despite all the fuss over ‘Buy American,’ at stake is
domestic prices are 25% higher than foreign bids, or only a small portion of the US package, and the ‘Buy
the use of domestic goods is not in the national Chinese’ provisions are largely empty. The negative
interest. Due to this requirement, foreign firms are effects of these measures are far outweighed by the
effectively shut out from the bidding process, positive trade effects of raising demand and domestic
directing the bulk of the US infrastructure stimulus consumption in the US and China.
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,
34
Trade Protection: Incipient but Worrisome Trends, World Bank, March, 2009
35Basedon the assumption that infrastructure and science share the same amount of allocation in the fund allocated for the two categories totaling $126 billion.
- 13 -

19. Chapter 7
Matters of Great Import
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
Together, the US and China stimulus
Based upon historical MPI data, we expect this GDP
increase to translate into a $298.0 billion increase in
packages are expected to drive
imports. Likewise, our analysis of historical (from $572.9 billion in imports
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.
36
Calculation of the Pulling Effect of the RMB Four-Trillion Plan on the Chinese Economy, Guo Ju’e, Guo Guangtao, Meng Lei, Xue Yong, December, 2008
37Year-by-yearEstimate of the Economic Effects of the American Recovery and Reinvestment Act of 2009, U.S. Congressional Budget Office, March, 2009
- 14 -

20. Chapter 8
Technology and Sustainable Development
Technology has long been a key driver of economic to maintain the US leading edge in science and
growth, allowing countries to create and realize technology, representing 8% of the US package.40
value-added products and services. Recognizing this This money will be spent on putting scientists to work
economic importance, both China and the US made looking for the next great discovery, creating jobs in
significant allocations towards promoting technology cutting-edge industries, and making smart
sectors, representing 14.5% and 16.3% of their investments, such as broadband infrastructure, that
respective packages.38 For both countries, this will help American businesses succeed in the global
allocation is split between promoting technological economy.
advancement and sustainable development. In terms
of allocations towards scientific advancement, the One area which also might contribute to the global
packages of each country are representative of their recovery is sustainable development and new energy.
current needs. The Chinese package is mainly geared China has devoted 5.3% of its package, or $30.8 billion,
at upgrading Chinese manufacturing infrastructure, towards promoting energy saving techniques, cutting
following the 11th Five Year Plan goal of upgrading emissions, and environmental engineering projects.
China’s industrial structures. Much of the Environmental sustainability has been a long-time
manufacturing technology introduced to China from concern of China due to the increasing environmental
abroad twenty to thirty years ago is now at the end of impact of its development, and promoting an
its lifecycle and needs to be replaced and upgraded. environmentally friendly society is another key aspect
Following goals outlined through the Chinese of the 11th Five Year Plan. While there is some
government’s latest development blueprint, China concern that other stimulus money could go to
has allocated 9% of its package, $54 billion, in order environmentally harmful industries, the situation for
to shift manufacturing away from export-oriented sustainable development in China looks hopeful. The
and labor-intensive growth models and towards high- stimulus allocations for green technology reaffirm
end production. Much of the technology required for China’s commitment to the environment and its
this transition is expected to be imported from recognition of the importance of sustainable
abroad; indeed, advanced electronics and machinery development to its economic future. This focus should
already represent 20% of China’s total import value.39 drive imports of clean technology from advanced
Imports of manufacturing equipment and technology economies such as the European Union and the
transfer are expected to have a positive effect on United States, who are the main creators and
global recovery, by supporting job growth in innovators in this field.
countries that are key suppliers of advanced
Similarly, the United States is also promoting
technology, such as the European Union, Japan, and
sustainable development and has devoted $65 billion,
the United States.
8.3% of its package, towards this goal. Most of the US
Indeed, the US stimulus allocations towards science sustainable energy allocations are for promoting
and technology are designed to reinforce the United renewable energy, in which the United States has two
States’ leading position as a technological innovator. main objectives. While environmental protection is a
Approximately $63 billion is being invested key driver, weaning the US from its reliance on foreign
38Basedon the assumption that infrastructure and science share the same amount of allocation in the fund allocated for the two categories totaling $126 billion.
39
Ministry of Commerce of China
40Basedon the assumption that infrastructure and science share the same amount of allocation in the fund allocated for the two categories totaling $126 billion.
- 15 -

21. 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 -

22. Chapter 9
Initiative in Crisis
Examining both the US and Chinese packages, it Looking to the post-recovery world, the influences of
becomes clear that their responses to the crisis the two packages are likely to have marked
address the specific needs of each economy. The differences. These are mainly due to the unique
United States, facing a meltdown in its financial dynamics of the US and Chinese economies, and the
system and being a consumer-driven economy, took mechanisms needed to address their individual
emergency measures to shore up its financial system recoveries. The United States is a developed economy,
and focused its stimulus package on promoting driven by consumption and already possessing basic
domestic consumption. China, a developing nation infrastructure. Its stimulus package reflects those
whose financial system escaped the crisis intact, conditions, and seeks to boost domestic consumption
focused its stimulus on providing infrastructure in line over a two year period in order to provide a jumpstart
with the 11th Five Year Plan that will aid the country’s to the economy. While some investment is being
long term growth. As the needs and responses of the made into funding infrastructure and technological
two countries are fundamentally different, it is innovation, the bulk of the US package is geared
difficult to directly compare their efficacies in bringing towards the short term and its potential dividends are
about domestic recovery. However, we were able to largely limited to setting the US economy on its pre-
analyze the two packages potential effects on crisis track. Post recovery, the US economy will still
promoting recovery through international trade, and embody the same basic dynamics as it did pre-crisis,
their influence in shaping the post crisis world. albeit with a hopefully better regulated financial
sector.
Aspects of both packages should have the effect of
promoting international trade, which is expected to The situation is very different in China, whose
contribute to global economic recovery. Despite economic growth is export and investment driven,
some protectionist sentiment, its influence is and whose national economic infrastructure is not yet
expected to be limited and should not form a lasting mature. It becomes apparent that the financial crisis
trend. We expect this short term, negative influence has provided unexpected opportunities for China’s
on international trade to be outweighed by the trade development and emergence on the international
that is promoted by various aspects of the two stage. China’s stimulus allocations have not been
packages, such as imports driven by American reac ti onary, i nst ead bei ng consi s ten t with
consumers who are provided with more money in development goals laid out by the 11th Five Year Plan.
their pockets as a result of boosts to domestic The vast majority of stimulus funds have gone
consumption. Additionally, China’s massive towards projects designed to bring about “concordant
infrastructure push is expected to drive demand for development among regions,” “upgrade industrial
imported engineering and manufacturing equipment structures” and build a “conservation minded and
and technology, providing a boost for economies that environmentally friendly society.” While these have all
export these goods. Finally, the focus on sustainable been policy goals for the past several years, they have
development by both packages creates further received relatively small amounts of direct funding
opportunities for trade in strategic metals and green from the central government. In 2008, for example,
technology. rural construction received 2.4% of the central
- 17 -

23. government’s budget allocations, transportation 7.8% criticisms of the dollar’s paramount status.
(not limited to infrastructure), and post-quake
In the wake of the crisis, China has taken numerous
reconstruction only 0.5%.41 Indeed, overheating
steps towards promoting internationalization of the
concerns over the past several years have caused the
Yuan: negotiating currency swap agreements with
government to restrict public and private investment
central banks in various countries worth a total of
in these key areas. The slowing down of the Chinese
RMB 650 billion, boosting its gold reserves, and using
economy and diminished overheating concerns due
the Chinese Yuan as a clearance currency for
to the financial crisis has provided an opportunity for
international trade.42 Additionally, the issuance of
China to fund these long term growth programs. The
RMB 6 billion ($878.5 million) in bonds in Hong Kong
infrastructure-related spending of the package,
in September was a major step towards promoting
approximately RMB 3.26 trillion, is over 20 times
the Yuan as an international currency.43 It seems that
larger than the yearly infrastructure-related spending
China may be serious in moving towards making the
in China’s 2009 central government budget. Using the
Yuan freely-convertible, a necessary step if it seeks to
massive amount of money injected by the stimulus,
transform it into an international reserve currency
China is able to dramatically accelerate these
and Shanghai into an international financial center.
development goals and lay the foundation for
upgrading its economy. For the United States and most of the world, the
financial crisis dealt a severe blow to economic
Promoting western and rural development and
development and required governments to take
allowing China’s underserved consumer markets to
emergency action in order to prevent economic
reach their potential is only one part of the equation.
collapse. For China, however, the crisis has been
The stimulus allocations towards upgrading China’s
more akin to an opportunity. Like the United States,
industrial structure and implementing sustainable
China has taken steps to promote a slowing economy
development will also aid China’s transition to higher
through stimulus measures; while both packages are
value goods and services. By importing foreign
targeted at domestic recovery, aspects of both
industrial machinery to upgrade its aging industrial
packages are also expected drive international trade
infrastructure, and stressing technology transfer in
which can help bring about global recovery. However,
manufacturing and sustainable development, Chinese
with its financial system intact and its economy still
industry can shift gears from basic production
growing, China has been able to focus on promoting
towards higher-value added production and
long term growth rather than on reactionary rescue
innovation. Doing so will allow Chinese industry to
and recovery programs. The economic slowdown
begin focusing on value propositions other than cost.
made it possible to fund a slew of infrastructure
As companies begin to offer higher quality goods,
projects that will accelerate the upgrading of China’s
they can start differentiating themselves and
economy. This transition to ‘Created in China’ is
developing the innovative products required for a
complimented by what is shaping up to be an
mature brand to capture more of the value chain, and
accelerated emergence of China in the world financial
transition from ‘Made in China’ to ‘Created in China’.
system. Through taking advantage of the
The opportunity for China to upgrade its economy opportunities provided by the financial crisis, we
could not be coming at a better time. Not only has expect China to take on an expedited new role in the
the financial crisis offered China opportunities to global economy in the years to come.
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
41Ministryof Finance of China
42
Wall Street Journal
43XinhuaNews Agency
- 18 -

24. Appendix I
General Methodology
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 -

25. Appendix II
Survey Results
How Appropriate are the Fund Allocations for the US How Appropriate are the Fund Allocations for the
Package? China Package?
No
Comment,
No Comment, 8%
15%
Appropriate,
31%
Not Appropriate,
Appropriate, 54%
38%
Not
Appropriate,
54%
Effects of the US Stimulus on Sustainable Effects of China’s Stimulus on Sustainable
Development Development
Inhibition, Inhibition,
42% 27%
Stimulation, Stimulation,
58% 73%
- 20 -

26. Appendix III
Calculations for Estimating the US and China
Packages’ Effects on Imports
Marginal Propensity to Import (MPI) refers to the Similarly, linear regression analysis based on import
change in import expenditure that occurs with a and GDP value of the United States from 1985 to
change in GDP. 2008 gives MPI = 0.2029 (go to Table of Linear
Regression). In regard to the pulling effect of US’s
MPI = dI / dY stimulus package on US economy, the Congressional
Budget Office of the US released its estimate of the
According to the increment in dY (i.e. change in GDP) economic effects of the American Recovery and
and MPI , we can calculate the change in import. Reinvestment Act of 2009 (ARRA, Public Law 111-5)
on March 2, 2009. According to their estimates,
Take China for example. Linear regression based on
totally 9.5% increase of GDP will be brought about by
import and GDP data from 1985 to 2008 gives (go to
the US package. Based on this as well as the US GDP
Table of Linear Regression)
in 2008 (that is $14.26 trillion), we can calculate the
overall increase of GDP caused by stimulus packages
I = 0.3149 * GDP – 82.1112
is $1.3547 Trillion.
Where the constant coefficient is: MPI According to MPI formula, we get
MPI = 0.3149 dI = 0.2029 * 1354.7 = 274.87 Billion
According to the estimates of researchers Guo Ju‘e, The ration of increase in import to the size of the US
Guo Guangtao, Meng Lei, Xue Yong, at Xi’an Jiaotong package is
University, China’s $587 billion (RMB 4 trillion)
stimulus package will push up China’s GDP by $946.2 g = dI / SP = 274.87 / 787 = 34.93%
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%
- 21 -

27. Source Data for the Linear Regression
$, billion
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
Regression Result:
China:
Imports = 0.3149*GDP - 82.1112, MPI=0.3149
USA:
Imports = 0.2029*GDP - 565.0564, MPI=0.2029
- 22 -