“China understands that it’s gaining importance in the world economy and that it’s going to participate in that process,” said Keith Fitz-Gerald, Money Morning’s investment director and a former professional trade advisor who’s spent more than two decades focusing on investment opportunities in China, Japan and the rest of the Asia region.

“Many experts will see this as just a ‘bailout’ that’s directed at Chinese infrastructure projects, Chinese technology companies and at holding the global financial crisis at bay” Fitz-Gerald said. “But the real message here is that Beijing is going to pull out all the stops to ensure that its economy does not falter. And that’s because China realizes that it’s become the super glue that’s holding the rest of the planet together.”

China on Sunday unveiled what it described as a “massive” economic stimulus package – a planned capital infusion of $586 billion that it plans to use to reverse its slowing domestic growth, to loosen domestic credit and to offset factory shutdowns and massive job losses caused by an evisceration of its export sector. Analysts also expect export growth to stall and actually reach zero in the months to come as global demand almost completely dries up.

In making this move, China becomes the latest major country to announce a stimulus package, following such nations as the United States, Germany and Japan. Governments have been injecting billions of dollars into their economies, as central banks around the world slash interest rates, all in the hope of avoiding a whopper global recession. Just last week, researchers at the International Monetary Fund (IMF) said that world growth would slow to a tepid 2.2% next year, down from the 3.7% growth estimated for this year. The IMF forecast for China slashed the growth rate down to 8.5% next year, down from an earlier projection of 9.3%.

But the world’s fourth-largest economy has almost reached the so-called “tipping point” – where increases in domestic demand can almost offset the loss of export revenue. So it wants to offset slowing global growth by stoking domestic demand – both to help itself and to remain enough of an economic oasis to possibly keep the global financial crisis from becoming a total financial rout. With record foreign reserves of nearly $2 trillion, China is in an excellent position to bring such financial firepower to bear on this growing global crisis, Money Morning’s Fitz-Gerald has repeatedly stated.

“To the extent that people are still worried that China will fall apart because of the global credit crisis – well, that remains an unknown,” Fitz-Gerald said. “However, I would point out that China is still on track for 9.6% growth, and that even if they were to get a recession, their growth is still going to be seven or eight times what ours [here in the United States] is projected to be.”
China’s plan calls for boosted spending on roads, airports and other infrastructure projects, tax deductions for exporters, and increased aid to farmers and to the nation’s poor. China’s high-tech sector is expected to be a big recipient, as will its fledgling aerospace sector. Spending on education will increase, and so will outlays for healthcare and environmental-protection programs.
For this stimulus package to work, China will need corporate investment and bank lending for rural projects, smaller companies and consumers. Beijing might supply one-quarter of the announced spending, or $145 billion, with the rest coming from increased investment by Chinese state companies, bank lending or bond sales by local authorities for individual projects, Ting Lu, a Merrill Lynch & Co. Inc. (MER) economist, told The Associated Press.

“Many state companies have a lot of cash,” Lu said. “They just need to use it.”

The Xinhua News Agency – China’s state-run news agency and the operator of China Radio International, the nation’s global shortwave broadcasting service – said late Sunday that the stimulus package represents “a shift long advocated by analysts of the Chinese economy and by some within the government. It comes amid indications that economic growth, exports and various industries are slowing.”

The decision was announced Sunday by the State Council after Premier Wen Jiabao presided over an executive meeting Wednesday. China reported in late October that its economy grew at a less-than-expected rate of 9% in the third quarter – its lowest level in five years and the fifth straight quarter that growth has slowed, MarketWatch.com reported.

At that meeting, Wen told government leaders that China must increase investment and consumer spending, maintain export growth, enhance corporate competitiveness, reform financial industries and improve the real estate industry so that it is able to grow in a healthy manner, according to a report read out on state television.

“We must implement the measures to ensure a fast and stable economic development,” Wen told those government leaders, the television report stated. “They are not only the needs of the development of ourselves, but also our biggest contribution to the world.”

China unveiled this huge financial package before President Hu Jintao attends a meeting of world leaders in Washington this week. The meeting is supposed to be a forum in which the leaders can discuss responses to the global crisis.

With this huge planned outlay, China has taken yet another giant step back from the anti-inflation measures and lending curbs that the Beijing central government has put in place over the past three years – only to start rolling them back since the middle part of this year because of mounting government alarm over falling exports and slowing economic growth. Those very real worries induced the government to embrace “dual targets” of nurturing continued frenetic economic growth while at the same time working to contain price increases. In that vein, Beijing has lifted limits on how much each China-based bank may lend and also cut interest rates three times in the past several weeks.

“As the global outlook deteriorates, we expect Chinese macro policy to turn increasingly aggressive,” Lu, the Merrill Lynch economist, and colleague T.J. Bond wrote in a research report Friday. “This is a key theme for China and indeed, the entire Asian region.”

This stimulus package will certainly provide a major boost to the Asia region. But its effects will be felt worldwide, says Money Morning’s Fitz-Gerald.

Westerners are “going to look at this stimulus package as a case of China trying to save its own butt,” Fitz-Gerald said. “What they don’t understand is that China views this as a case of them saving ours. That’s the big difference.”

Source: Massive China Stimulus is Viewed as an Attempt to Help the West

- Italy may be the next country to ‘rescue’ its economy with taxpayers’ money. According the The Times the Italian government was working on plans over the weekend to pump as much as $26 billion into its biggest banks.

- Uncle Sam is about to bailout AIG from its bailout. Apparently, the original handout was too tough on poor old AIG. So now its going to get a sweeter deal. This from the WSJ:

The U.S. government reached a deal Sunday night to scrap its original $123 billion bailout of American International Group Inc. and replace it with a new $150 billion package, according to people familiar with the matter.

While the arrangement stands to considerably ease terms on the faltering insurer, it gives the government an unprecedented role as an actor in financial markets. It could also spark a political backlash, especially from congressional Democrats, because the Treasury, while adding to its AIG obligations, has thus far refused to extend a hand to the struggling Big Three auto makers.

- According to Infectious Greed blogger Paul Kedrosky, AIG “is serving as a kind of orifice via which the global credit default swap system pushes out its collateral calls, and it is forcing the U.S. government (read: you and me) into levering up on the other side. As long as asset prices keep falling, increasing the amount of collateral required in AIG’s ‘policies,’ these calls will keep coming, making AIG’s liabilities – and therefore ours – frighteningly open-ended.”

As Milton Friedman once put it, ” Nothing is so permanent as a temporary government program.”

- Of course, the story of AIG’s demise and its now near “zombie” status – it now relies on taxpayers’ money to stay afloat – is replete with ironies. AIG’s immediate problem is that it is neck deep in credit default swaps (CDSs), which it now must cover. As George Soros points out in the December issue of the New York Review of Books, the same administration that let the $50 trillion market for CDSs go “entirely unregulated” is now essentially left on the hook for these instruments.

Take for example credit default swaps … instruments intended to insure against the possibility of bonds and other forms of debt going into default, and whose price captures the perceived risk of such a possibility occurring. These instruments grew like Topsy because they required much less capital than owning or shorting the underlying bonds. Eventually they grew to more than $50 trillion in nominal size, which is a many-fold multiple of the underlying bonds and five times the entire US national debt. Yet the market in credit default swaps has remained entirely unregulated. AIG, the insurance company, lost a fortune selling credit default swaps as a form of insurance and had to be bailed out, costing the Treasury $126 billion so far. Although the CDS market may be eventually saved from the meltdown that has occurred in many other markets, the sheer existence of an unregulated market of this size has been a major factor in increasing risk throughout the entire financial system.

- Turns out Hank Paulson gave his bank pals and even sweeter deal than was oringinally reported under the terms of the $700 billion bailout bill. This from The Washington Post:

The sweeping change to two decades of tax policy escaped the notice of lawmakers for several days, as they remained consumed with the controversial bailout bill. When they found out, some legislators were furious. Some congressional staff members have privately concluded that the notice was illegal. But they have worried that saying so publicly could unravel several recent bank mergers made possible by the change and send the economy into an even deeper tailspin.

“Did the Treasury Department have the authority to do this? I think almost every tax expert would agree that the answer is no,” said George K. Yin, the former chief of staff of the Joint Committee on Taxation, the nonpartisan congressional authority on taxes. “They basically repealed a 22-year-old law that Congress passed as a backdoor way of providing aid to banks.”

The story of the obscure provision underscores what critics in Congress, academia and the legal profession warn are the dangers of the broad authority being exercised by Treasury Secretary Henry M. Paulson Jr. in addressing the financial crisis. Lawmakers are now looking at whether the new notice was introduced to benefit specific banks, as well as whether it inappropriately accelerated bank takeovers.

It sure does pay to have friends in high places…

- All of this is small potatoes next to the Fed’s spiraling loan portfolio. Accoridng to Addison Wiggan and Ian Mathias at The 5 Min Forecast:

Ben Bernanke’s balance sheet expanded to a record $2 trillion this week — $2.058 trillion, if those billions even matter any more. That’s more than twice its size at this time last year.

The Fed’s loan portfolio is so bloated, we hardly know where to begin: Average DAILY bank borrowing from the Fed exceeded $359 billion last week… the Fed’s Commercial Paper Funding Facility has nearly doubled, and now holds $243 billion in “no one else will buy it” cooperate debt… primary dealers and brokers are running a $71 billion tab… AIG still owes $81 billion… it just keeps going and going. Over a third of the balance sheet is made up of some sort of bank loan or toxic asset.

Who’s paying for it? The U.S. Treasury has set up a supplementary funding account with the Fed, which is fueled by T-bill sales. That fund now exceeds $558 billion.