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US plan no 'magic bullet'
By Hu Yuanyuan (China Daily)
Updated: 2009-02-12 08:04

 US plan no 'magic bullet'

US Treasury Secretary Timothy Geithner testifies at a Senate Banking Committee hearing in Washington DC on Feb 10. Bloomberg News

China's economists were less than enthusiastic about US Treasury Secretary Timothy Geithner's new plan to stabilize the financial market, but still regard it as a positive sign for the country's exports and foreign investment.

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"I could hardly pick out the core information from the new plan," said Zhao Xijun, professor of finance at Beijing-based Renmin University of China.

"It is too sketchy and vague, without clarifying the capital source and specifying ways to address toxic assets. Such a plan could be hardly welcomed when the whole market and firms are looking forward to clear, practical and powerful plans," Zhao added.

And that's why US stocks plunged on Tuesday as markets gave a thumbs-down to Geithner's plan, which the secretary presented to the US Senate Banking Committee. Investors were concerned that the new initiative might prove inadequate.

Compared with China's 4-trillion-yuan stimulus package which integrates fiscal, tax and financial measures, the latest US plans seem to lack coordination, said Zhao.

In the just-launched "financial stability plan", a key element will be a public-private investment fund started with an initial corpus of $500 billion "with the potential to expand up to $1 trillion". This is expected to help cleanse the banking system of toxic real estate assets.

US plan no 'magic bullet'

This will function as an aggregator bank, or "bad bank", to help financial institutions value their mortgage securities and clear their balance sheets off risky bets on a US housing market.

"But I really doubt in such a time when almost each US financial institution is struggling to survive the worst economic recession since the 1930s, they have the ability and would like to finance the public-private investment fund," said Chen Gong, chief economist and chairman of Anbound Group, a Beijing-based consulting firm.

According to Chen, the capital source for the US government's rescue plan is still unclear.

"Heavily relying on the issuance of the Treasury bond is not a sustainable way and may finally hurt the US credit market and disperse the capital to other investment channels," Chen pointed out.

Though many experts have questioned Geithner's plan, most of them believe the plan, at least, is better than no plan at all.

"Whether the plan moves on as expected or not, it could still help to ease the financial turbulence and stabilize the market, thus speeding up the recovery of the US economy," said Lian Ping, chief economist with Bank of Communications.

Although Lian believed countering China's economic downturn still largely relies on domestic factors such as stimulating consumption and investment, a quickened recovery of the US economy would help China's exporters.

A revived market would also help reduce losses by China's investments in the US.

Geithner's initiative, covering the mortgage market and consumer lending, is more comprehensive than predecessor Hank Paulson's $700 billion Troubled Asset Relief Program, said Lian. Among other measures, the new plan commits $50 billion to prevent "avoidable foreclosures" of owner-occupied homes by helping to reduce monthly payments for middle-class families.

US plan no 'magic bullet'


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