Mizuho Daily – 2 Plus 1 Equals 7 and Double?

Vishnu Varathan, Head, Economics & Strategy, Asia & Oceania Treasury Department, Mizuho Bank, Ltd.,

2 Plus 1 Equals 7 and Double?

That appears to be the Budget math for Biden’s highly anticipated infrastructure plan with over $3trln in infrastructure and development spending over 8 years to be funded by tax proposals over the next 10 years .

Let us explain our leap (or lack?) of logic. While Biden’s development spending is indeed the crux, bond markets and political pundits must look at both the spending and funding to gauge how it will take off. “2 Plus 1” is self-explanatory given ~$2trln ($2.26trln to be precise) in infrastructure spending* to be followed on by another $1trln to follow (on childcare, healthcare, and education). How does that “equals 7 and Double”? Well, this is the funding aspect of the plan.

– Biden’s plan proposes raising corporate tax rate by 7%-pts to 28% (from 21%), partly reversing Trump-era tax cuts (from 34% to 21%) and doubling the rate of global minimum tax (rate to 21% from 10.5%.The “7 and Double” will constitute the majority of tax initiatives.

Equities were mostly buoyed by the bold spending plan aimed at lifting longer-term US growth capacity and global competitiveness.And tech stocks rallying more than industrials reflect the catch-up in the realization that Biden’s infrastructure relied on technology! USD was a tad softer though UST yields were mostly higher, with 10Y nudging up against 1.75%; and arguably the jury is out on the politics of passing the plan; mostly on funding it!

China’s Surge is Qualified, Not Unbridled

China’s upbeat manufacturing PMI for March (accelerating to 51.9 from 50.6) was eclipsed only by non-manufacturing spike (from 51.4 to 56.3); led by staggering construction pick-up. So is China’s economy set to surge blowing away already optimistic expectations? Well, yes and no. “Yes “, to the extent that China is set to lead the way out of the pandemic, and 2021 GDP growth could in fact outperform at 9-10% (consensus: 8.5%).

But “no’, insofar that PMI data overstate underlying strength and under-account for policy and geopolitical challenges which threaten to impede sustained growth above 6.0-6.5%. But such is the nature of PMIs; a short-term gauge with sequential perspective. And so, China’s surge is qualified, not unbridled.

For one, post-holiday bump and vaccine optimism flatter. Second, China burgeoning debt burden at some 315% of GDP means that credit intensity of growth will be much higher and so it will be harder to spur growth with incremental credit. More importantly, the PBoC intent of avoiding the “Minsky trap” will calibrate credit growth. Third, worries of an asset, in particular property market, bubble also suggests that Beijing will dampen property investments, thereby curtailing a key source of growth boost.

Whereas the construction PMI surge reflects completions catching up with sales as a wider adherence to the “three red lines” prudential measures instituted by Beijing. Fourth, China’s ambitions to move up the value chain in the context of “dual circulation” entails reallocation of resources (from “old” to “new” and “high-tech”). As a corollary, this could require “Schumpeterian destruction” that initially compromises on growth.

In particular as the initial stages would require spending resources, at the expense of near-term growth, to attain technology, “know how” as well as to incentivize cutting edge R&D. Finally, US’ multilateral approach to hold China accountable may also “cost” some GDP. Above all, is that markets’ obsession with China growth numbers is at odds with Beijing’s approach of de-emphasizing quantitative growth targets in favour of quality and strategy.