Will China Lead or Follow in Terms of Fiscal Stimulus?


Prior to the 2020 developments, many experts were perpetuating a “normalization” narrative, from the normalization in terms of interest rates (which many assumed would continue representing the status quo) to even scenarios which involved at least some kind of a Federal Reserve balance sheet reduction. Needless to say, with the benefit of hindsight of course, the narratives in question have proven to be nothing more than (monetary and/or fiscal) fairy tales.

The reality?

From China to the United States… stimulus on steroids, on both fronts. In the aftermath of the Great Recession, the proverbial main game in town was represented by monetary stimulus, with the Federal Reserve run by Ben Bernanke (at that point in time) leading the way. This time around, Jerome Powell’s Federal Reserve can no longer act as the main game in town… not because it doesn’t want to (hint: it does) but rather because the market demands a bi-dimensional approach which consists of potent monetary as well as (or especially, that will remain to be seen) fiscal stimulus.

To put it differently, in pretty much all countries, the market is no longer content with monetary stimulus aimed at saving the financial system, much more is requested in 2020 and beyond, with many of those requests revolving around fiscal policies aimed at:

  1. Rescuing affected industries, anything from the obvious suspects such as airlines and cruise operators to restaurants, hotels and the list could go on and on
  2. Rescuing the average individual through variations of the Universal Basic Income model. For example, the US initiative of sending $1,200 checks to the average individual (as a part of a $2 trillion rescue package that includes a wide range of other projects) can be considered just that, albeit a temporary one… for now, at least
  3. Re-igniting the economy through government spending, Keynesianism on steroids if you will. To put it differently, in light of the fact that the private sector is in survival (in the form of de-leveraging) mode rather than aggressive, the market demands that the state steps in so as to fill that void by investing heavily in public works such as infrastructure-related projects

Who is leading the way?

This all depends on how many steps back, if any, we are to take.

If we look at the 2020 situation in isolation, it is actually China that leads the way in light of the fact that it was the first coronavirus-affected nation, before the term “COVID-19” even became (in)famous. As such, it was also inevitably also the first which stepped in so as to rescue the economy. And while China doesn’t seem as burdened as other countries from the perspective of public and/or household debt, the same cannot be stated about the corporate debt dimension (with China arguably being in even worse shape than one of the usual suspects in this department, Japan).

What about other countries?

One after another, they embarked on the same journey, with Donald Trump at least making it clear that the United States has every intention of taking the lead on this matter. The US President even pressured the Federal Reserve Chairman (the previously-mentioned Jerome Powell) into being much more aggressive after expressing his very vocal disappointment in the “only” 50 basis point cut the Federal Reserve implemented at the earlier stages of the 2020 situation, even if this cut was very early, coming well before the Fed meeting that had been scheduled beforehand.

To paint the picture in a different manner: China did indeed take the lead as far as the 2020 developments are concerned, with other geopolitical players following in its footsteps and some of them (most notably the United States) even expressing interest in taking (over) the lead. It should therefore come as no surprise that shortly after the record-breaking $2 trillion bipartisan stimulus package that was approved by Congress, President Donald Trump made it clear that the United States needed to take advantage of the 2020 ultra-low interest rate environment so as to make significant infrastructure upgrades.

Speaking of the US, all we need to do is take a few steps back and realize that the “actual” leader of the let’s call it global dovishness trend has been none other than the United States. This becomes obvious when analyzing not the Great Recession but the financial calamity with global implications that came before it: the bursting of the Dot-Com Bubble, where the Chairman of the Federal Reserve at that point in time set the proverbial tone.

Realistically speaking, it was the United States that set the current mega-trend in motion and to be even more specific and point to just one individual, a more than compelling case can be made that the proverbial mastermind was none other than Alan Greenspan. Of course, few things are set in stone when it comes to debates as controversial as this one but as a general idea, as far as the opinions of the ChinaFund.com team are concerned at least:

  1. If we simply look at the year 2020 in isolation, then yes, a compelling picture can be painted which points to China being the “leader” in terms of aggressiveness
  2. If we take precisely two steps back, however, we almost inevitably come to the conclusion that the current landscape has its origins in US action, more specifically in the action of the Federal Reserve under Chairman Alan Greenspan

As time passes, the ChinaFund.com team will keep readers and especially clients posted as to how the 2020 situation unfolds. As far as this specific article is concerned, however, we believe it is important to have the chronology right when analyzing the origins of a trend which will generate widespread economic implications for years and most likely even decades to come. As such, being thorough not only helps, it is downright mandatory and we are, as always, here to assist with just that.