China plans to spend $137B on infrastructure to boost economy

China is considering increasing its budget deficit to spend an additional 1 trillion yuan ($137 billion) on infrastructure projects. This proposed stimulus spending aims to boost China's economy by funding construction. However, the expanded deficit would surpass the government's 3% GDP target.

Yahoo Finance reporter Jared Blikre analyzes China's proposed infrastructure spending increase, examining the market trends and economic factors that likely influenced this policy decision.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Video Transcript

AKIKO FUJITA: For reports suggesting Beijing plans to stimulate China's struggling economy giving Chinese stocks a lift today, the world's second biggest economy, considering raising its budget deficit to spend more on infrastructure. More on China's outlook, we're bringing Yahoo Finance's Reporter Jared Blikre.

Jared, we should say moves on the back of China's outlook. What are you seeing today?

JARED BLIKRE: Yes. Well, let's go to the Wi-Fi interactive. A picture is worth a thousand words, right? China has been under a lot of pressure this year in its markets, and it's been trying to stimulate these markets piecemeal. What you're looking at here is the NASDAQ Golden Dragon Index components. And you can see more green than red here on the back of the news of this stimulus.

Basically, the federal government there is going to spend an extra trillion yuan, that's about $137 billion, in addition to what it was already going to spend. And this is significant because this is going to exceed its target of 3% of GDP. It doesn't want to have a budget deficit of greater than that. This is going to send it over the edge.

And let's just focus on this heat map that I have working on the screen right now. You can see a bifurcated market. This is a year-to-date. And if I put this on the last two months, you can really see the red kind of explode to the downside. This is where a lot of the losses have been taking place.

And these are in some big names and some small names. You take a stock like Alibaba, which is down 8% year to date. That's kind of-- it looks like a lot of other stocks here. Nothing extravagant to the upside or downside. Pinduoduo is one of the better behaving stocks. This only recently just broke out of its trading range for the year.

But overall, after the initial expectations of that restart at the beginning of the year, beginning of the year after those faded, the federal government there and the PBOC have been trying to inject liquidity into the markets, but they do so at their own peril. Because once they ramp up their spending, that weakens the yuan, the currency.

Now, we're looking at here on the Wi-Fi interactive, the US dollar versus the yuan. You can see the US dollar is sitting by the highs of the last year. In fact, it exceeded these highs from one year ago. And if I show you a Max chart, you can see that there's not a lot of overhead resistance. We're basically at 2007 levels when the exchange rate was dropping, dropping, dropping into a new range.

So not a lot of overhead resistance right there, which means that the Chinese government, if they issue too much curren-- if they issue too much debt, or if they deflate their currency too much, well, they're going to have a problem on their hands because that encourages capital flight out of the country. And so that's kind of what they're battling there.

It's a big move for China because it basically signals that the policy errors of the past are going to be corrected with more printing of money. And that always means more devaluation of the currency. It's just a question of what-- excuse me, at what rate and relative to the other currencies of the world how does that play out.

AKIKO FUJITA: Yeah, it's starting to sound like a very familiar plan that we have seen out of China. We'll continue to watch that story. Yahoo Finance's Jared Blikre.