Power And Dollar

China annual budget and effect

China announced its budget on 03.05 W.  News focused on 17.8% military budget increase.  That news does not translate much into our daily lives.  It does give content to McCain, Obama and Clinton.  What really matter are the following: 0.8% budget deficit; department reduction; increase spending in pre-university education, medical service and low income housing budget; expand medical insurance system; more work will be done in the agriculture industryThe only item I want to cover that has some military content is another military personnel reduction of 200,000; departments and increase retirement benefit (the equivalent of social security benefit in the States).  

0.8% is the lowest budget deficit China has had for decades.  For one, revenue has increase this year.  This is actually not due to a growing economy (China has been growing 8% annual for decades now), but due to an active stock market: China levies a fee on stock trading.  China is not increasing its total expense amount due to this increase of revenue.  It is controlling its budget well, increasingly well.  The good reason for them to do this is: the private sector has grown such a pie that executive orders no longer work well.  Controlling public expenses is one effective way to control inflation.  And China is feeling the pain of inflation, after decades of 8% GDP growth.  

China reduced ¼ of its departments.  This is the second wave of government staff reduction.  The first wave is the military personnel in the last 2 decades.  This has some impact on expenses.  But more importantly, it is about releasing control.  China is slowly liberalizing itself.  This trend is either motivated by the mid-level bureaucracy with enthusiasm from the top or all the way from the top.  Either way, this trend will continue for years to come.  This is not a one-time reduction.  However, future reduction may not have as much as fireworks as this one.  Increasing retirement benefit is a way to appease these laid off staff, especially military personnel.  

The work in the agriculture industry does not seem to have great impact on the budget.  However, that is the real work by the government staff.  And it has political implication if it does not perform well.  After all, China continues to have ¾ of the population to be farmers.  

This Increase spending in social net can be read in 2 ways:

1)      Now that revenue is increased, there is no further excuse not to do this, i.e. this is a hindquarter covering exercise.  After all, it is said that Hu was asked by Bush about his military intent.  Hu’s response was that he had so many domestic political problems, such as farmers’ protest, workers’ strike, ; and/or  

2)      China has as big, if not bigger, a baby-boomer problem as US, Canada or any OECD country.  And their solutions were: decrease population growth and increase productivity.  The only alternatives were to increase labour force size (which is just increase population) or to secure resources militarily.  This increase in public safety spending is an indication that Chinese bureau cry/Chinese communists are getting confident that their carrots will be rewarded politically.  And this implies their comfort of their authority in governance.  They are probably walking out of their Tiananmen Massacre shadow. 

This prudent budget management will be another chip to increase the Chinese yuan against all currency.  If this factor does not only materialize into trading bands, but also traded into a meaningful way into the pricing system, then it will have affect US inflation and thus the election cycle.  I personally do not expect effect to that great of a magnitude.  However, a penny makes a big difference at this level.  

This also leads a higher commodity prices directly as a result of this budget, especially in cement, wood, iron, coal.  Publicly traded construction will continue to do well.  Furthermore, transportation companies, both shipping and trucking, will have impact.  The effect of this annual report with implication outside of the mere budget figures is written into another piece.


March 6, 2008 - Posted by | china politics, Current Affairs, economics, politics | , , , , , , ,

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