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Chinese Stimulus May Affect Commodity Prices

MELISSA BLOCK, host:

So how will that very big plan to stimulate the Chinese economy affect other economies around the world, including our own? We're going to put that question to Simon Johnson, former chief economist for the International Monetary Fund. Thanks for being with us.

Professor SIMON JOHNSON (Entrepreneurship, Sloan School of Management, MIT; Senior Fellow, Peterson Institute for International Economics): My pleasure.

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BLOCK: And Mr. Johnson, is maybe the most direct effect here that China is leading by example? It's providing a spur for other countries to follow suit.

Professor JOHNSON: Yes, absolutely. The IMF, for example, has been calling for pretty much all countries to undertake some sort of fiscal stimulus. And this is a very big stimulus. This dwarfs what, for example, the Germans announced last week. And it really ups the ante. It puts a bit more pressure on the U.S. and others.

BLOCK: And there would be a political benefit as well. China can say, we've taken the lead in the global economy. We're adding stability to world markets.

Professor JOHNSON: Yes. And they can also say, let's not talk about our exchange rate quite as much. They're a bit uncomfortable with some of the pressure they've had to appreciate the renminbi, their currency. And it may also reduce some of the pressure on China to contribute part of its vast, $2 trillion worth of reserves to some sort of scheme that will increase the capital of the IMF. The IMF is still short of money. The Chinese could still contribute. But they're going to say, look, we gave at the office. We did the big fiscal stimulus. Let someone else step up and provide more money to the IMF.

BLOCK: Now, we just heard in that report from Louisa Lim that the spending, this $586 billion, is domestically oriented. It will be spent on housing and transportation and infrastructure. So how does that end up influencing economies outside of China?

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Professor JOHNSON: Well, it has a couple of effects. One is it keeps China growing, hopefully. And we're all, you know, linked together. As you said, China was about a quarter of global growth last year. Global growth is expected to be 2.2 percent next year. That's a pretty low, pretty disappointing growth rate. If you lose - or the Chinese part of that falls off, that's not going to be good for anyone. And the more direct effect is clearly on demand for commodities. China is a very big consumer of oil, of food, of all kinds of raw materials. This is going to keep commodity prices higher than they would otherwise be.

BLOCK: So in other words, these big projects will require more imports. China will boost the markets for those around the world?

Professor JOHNSON: Yes. It's not clear it really helps imports of manufacturers into China. But China imports a lot of its raw materials. Particularly as they're already going pretty much all out on infrastructure spending, they're going to be pulling in more raw materials. And that will help anyone who exports commodities of any kind, including, of course, the United States.

BLOCK: China holds a huge amount of U.S. debt. It's something on the order of $540 billion, I believe. If they're spending this much money on domestic stimulus, does that mean, by extension, that there would be less money from China to buy up, say, U.S. Treasury notes?

Professor JOHNSON: Well, there would be less holding or less purchases by China of U.S. Treasury notes if there's an effect on that current account. So their purchases come from the fact that they sell to the outside world a lot more than they buy from the outside world, and they have to do something with that extra money. What they usually do with it is put - we think, they put most of it in U.S. Treasury. Actually, what they do with it is a fairly closely held secret.

So if this extra spending means that their current account surplus becomes smaller, then there's less available to buy U.S. Treasuries, and you'd expect U.S. interest rates to go up a bit. But I'm not sure that's what's going to happen. The experts, the people who are looking very closely at China's trade pattern, are thinking that their surplus may be about the same next year as it is this year. And in any case, we're not expecting a big effect there. So that probably is not a big first-order effect.

BLOCK: Well, given what China has now done, what countries would you expect to be next in line to announce something similar? Not on this scale, perhaps, but something similar.

Professor JOHNSON: Well, that's the really interesting question for the week. And I think the most likely contenders probably come from Europe, particularly - my favorites would be France and the U.K. And maybe as an outside bet, I might have a go, also, on Italy as having the ability to put something interesting on the table in terms of fiscal stimulus. Not, I would emphasize, anything like the scale that China is proposing.

BLOCK: OK. Simon Johnson, thank you very much.

Professor JOHNSON: Thank you.

BLOCK: Simon Johnson is a senior fellow at the Peterson Institute for International Economics, and a professor at the MIT Sloan School of Management. Transcript provided by NPR, Copyright NPR.

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