Now that the dust has cleared, it appears that the China plan is not entirely as big as advertised — further diminishing the halo effect on the global economy.

When originally unveiled, China’s $600-billion plan proposed a massive infrastructure build-out through 2010 to help create jobs and shift the country away from it’s over-reliance on exports, which have suffered from the global recession.

The announcement was framed as a brand-new initiative. The blueprint China laid out before the world included projects for low-cost housing, airports, roads, highways and aid to farmers. Pundits saw the investment by China as an overnight boom for raw materials, although we took a wait-and-see approach.

Asian stock markets surged on news. Japan’s Nikkei index jumped 5.8% while Hong Kong’s Hang Seng index gained 3.5%. In China, the Shanghai Composite index jumped 7.3%.

So much for the herd…

Because it now seems that many of the projects China had included as part of the $600 stimulus were already in the works prior to the big announcement. So what had initially appeared as a grand stimulus turned out to be a staged PR event.

Reuters recently characterized the stimulus package as comprised of “old budget commitments, double-counting and empty promises. It was thus mainly propaganda, to convince China’s own people and the outside world that the government was serious about stimulating demand at home.”

Reuters quoted Shanghai Citigroup Ken Peng as saying, “The stimulus package is big, but it’s actually a combination of a lot of things that have already been announced.”

A glaring example of China’s PR machine in action is that the $600-billion package included nearly $3 billion that Beijing had already earmarked for rebuilding in Sichuan province and other regions devastated by the earthquake earlier this year.

The stimulus plan also called for some $292 billion on the railway system. But Ting Lu, a Merrill Lynch analyst, reported that most of it had been previously allocated. He pegged the real number at $58 billion of new funds — still a sizeable number but far short of what China led the world to believe.

Given China’s lack of transparency, the ultimate net number of new funding will be almost impossible to ferret out. But in the end, it becomes increasingly apparent that Beijing is playing a shell game with investors. You can try to figure out where the pea is, or put your money someplace else.

– U.S. stock futures are pointing higher this morning ahead of a widely anticipated cut in key lending rates by the Fed. Futures traders expects the Fed to bring rates down a half-point to 1%. “S&P 500 futures climbed 32.4 points to 867.10 and Nasdaq 100 futures rose 44 points to 1,206.00. Dow industrial futures rose 300 points,” according to MarketWatch.

– Traders across the globe appear to have snapped out of their funk also. Japan’s Nikkei index is up 7%, Hong Kong’s Hang Seng is up 14%, and London’s FTSE is up 2% as of 5:40AM EDT.

– Gold is up in London this morning as stocks rally. So far this month, traders have knocked 14% off the price of gold as they sold assets to raise cash. “Gold for immediate delivery gained $14.92, or 2 percent, to $745.72 an ounce as of 8:56 a.m. in London,” according to Bloomberg.

– Oil edged up toward $64 this morning. The black goo is also tracking the recovery in European and Asian stock markets.

– “U.S. 10-year Treasuries fell the most in almost three weeks as stocks rallied and the U.S. government prepared a record $34 billion note sale to help pay for bank rescues,” reports Bloomberg.

– Don Boudreaux at the Cafe Hayek blog heaps more misery on the head of former Fed head Alan Greenspan by way of a letter to the WSJ. Well put, Don…

To the Editor:

Alan Greenspan now blames deregulation for today’s financial turmoil (”Greenspan Admits Error to Hostile House Panel,” October 24).  Whatever deregulation there was, and whatever its merits or demerits, there is one crucial financial instrument – dollars – that throughout was supplied by an utterly unjustifiable state monopoly – the Fed.  Unfortunately, this decidedly unfree-market arrangement draws little attention.

Skepticism is advisable when the former head of a government-created and protected monopoly blames the market for using that monopoly’s output unwisely.  Would the demand for mortgage-backed securities have been as frothy as it was if Mr. Greenspan’s Fed had not created so much new money?  Would the demand for owner-occupied housing itself have been so intense?  Because money plays a common and vital role in all of these transactions – and because Mr. Greenspan’s Fed kept pumping dollars into the economy with no way to know what the ‘correct’ supply is – you’ll pardon my inability to give credence to Mr. Greenspan’s latest pronouncements.

Sincerely,
Donald J. Boudreaux

– Friday’s improvement in U.S. existing home sales data is no doubt having a positive effect on the markets. New home sales were up 2.7% from their 17-year low in September. The question is: Will the uptrend hold? This from Rob Parenteau, the new editor of the Richebacher Letter, as quoted in The 5. Min Forecast.

We have to wonder whether this [improvement in housing] will hold in the months ahead. Layoffs are mounting across many industries and the prospect of further foreclosures weighing on the market must be rising.

Initial unemployment claims are pushing through the prior two recession highs. As personal income growth slows, household debt servicing is bound to become even more problematic, barring a much lower mortgage rate environment.

While the money markets seizing up was the clear-and-present danger, the attempt to reel in mortgage rates must be the next policy priority. Beyond that, perhaps with a stabilization in the equity market from oversold conditions, value players may start to arbitrage corporate bond yields in. Without this type of sequencing, a lower fed funds rate does not mean much beyond some possible psychological relief for equity investors.

Refi activity remains well below its peak rate level back in February, and the longer it takes to get mortgage rates down, the more homeowners will be unable to refi as home values fall below mortgage loan values. Surprisingly, bank real estate loan activity has not fallen off a cliff, although that is mostly because households are still tapping home equity lines of credit, while mortgage loans for purchases have gone flat.