China’s Stimulus Plan Ignites Economy

Seeking Alpha reports that China's Stimulus Plan Ignites Economy.

(emphasis mine) [my comment]

China's Stimulus Plan Ignites Economy
by: Money Morning February 15, 2009
By Don Miller

China' s giant $585 billion (4 trillion yuan) economic stimulus package is showing signs of taking effect. Economists now project that China will be the likely leader of an elusive worldwide economic recovery.

Chinese banks heeded the government' s call to extend more credit to support the economy as they issued $237 billion (1.62 trillion yuan) in new loans in January, up a whopping 101% year-over-year, the People' s Bank of China said. The surge provides evidence that state-owned banks are heeding the government' s call to extend more credit to support the economy.

"The banks are fighting for the best projects in the government' s stimulus package,” Ha Jiming, chief economist of China International Capital Corp, told China Daily. "It' s not surprising to see that an array of the deals were sealed in the past month."

The massive jump in lending is equal to about one-third of the loans issued in all of 2008, prompting some economists to say the government might discontinue cutting interest rates.

"The bank lending figures are just a stunningly good piece of news for China," Glenn Maguire, chief Asian economist for Societe Generale in Hong Kong, told Reuters.

Now, it looks like the lending is spurring China' s turnaround. According to the median estimates of 14 economists in a survey released Friday by Bloomberg News, the world' s third-biggest economy will expand 6.6% in the second quarter after slowing to 6.3% in the first quarter.

That growth will accelerate to 7.2% for the full year, according to Wang Qian, an economist with JPMorgan Chase & Co. in Hong Kong. Stimulus spending will account for 3% of the total, she estimates.

"China looks set to be the first major economy to recover from the current global meltdown,” said Lu Ting, an economist with Merrill Lynch & Co. in Hong Kong, told Bloomberg Asia. "China is the only economy in the world to see significant growth in credit to corporate and household sectors after September 2008, when the financial crisis worsened to a near collapse.”

As Money Morning reported in its Outlook 2009 series, there is ample evidence that the stimulus will be large enough to assure China' s economy and markets will weather the storm and ultimately thrive in the year ahead.

The government announced the huge stimulus package on Nov. 9 to boost domestic demand and shore up investment. Though the central government will bear one-third of the cost, state-owned banks will play a critical role in financing the construction of bridges, railways and highways.

China is trying to recover from an economic slide that forced it to shed 20 million jobs, as exports dropped and the real estate market slumped. Spending on roads, railways and housing has increased prices for iron ore and other commodities, and helped drive the record number of new loans in January.

The lending multiplies the effect of the government' s spending in ways that wouldn' t be possible in the United States and Europe, where banks are burdened by toxic assets
, Dwyfor Evans, a strategist with State Street Global Markets in Hong Kong, told Bloomberg.

Stimulus projects are evident throughout the country. The building of public houses in Shaanxi province and Shanghai began in December, while Shandong province started work on three new railway lines the same month.

"The economy is bottoming,” Tao Dong, chief Asia economist at Credit Suisse Group AG in Hong Kong, told Bloomberg.

Prices for China' s imported iron ore has climbed 28% since October. Hot-rolled steel has surged 41% and the Baltic Dry Index, or shipping costs for commodities, has more than doubled since Jan. 28.

"You are starting to see the underlying demand of the Chinese economy,” BHP Billiton Ltd. (BHP) Chief Executive Officer Marius Kloppers said Feb. 4. "We have seen in the steel business in China that the de-stocking cycle is almost complete and that means people are coming back into the market and buying.”

Even if the global recession lasts years, China has the ammunition to maintain growth, said Merrill Lynch' s Lu. It has public debt of only 18.5% of gross domestic product, foreign currency reserves of $1.95 trillion, and a balanced budget.

"China has perhaps the deepest pockets in the world,” Lu said. "It can relentlessly ramp up spending to create jobs and meet its growth target.”

Investors are also showing a renewed interest. Stock volumes on Feb. 11 were the highest in at least three years. The Shanghai Composite Index of stocks has climbed about 36% from November' s lows on optimism that government spending will bolster corporate earnings.

My reaction: This article summarizes a lot of what I have been writing about China

1) Economists now project that China will be the likely leader of an elusive worldwide economic recovery.

2)
Chinese loan growth and money supply surged in January.

3) China is the only economy in the world to see significant growth in credit to corporate and household sectors after September 2008.

4) Bank lending is multiplying the effect of the government's spending in ways that wouldn't be possible in the United States and Europe, where banks are burdened by toxic assets.

5) Prices for China's imported iron ore have climbed 28% since October, and prices of Hot-rolled steel have surged 41%.

6) The Baltic Dry Index, or shipping costs for commodities, has more than doubled since Jan. 28, as
rising grain shipments further drive up freight rates.

7) China has the ammunition to maintain growth: public debt is only at 18.5% of gross domestic product, foreign currency reserves are over $2 trillion, and the Chinese budget is balanced.

8) The Shanghai Composite Index of stocks has climbed about 36% from November's lows


Conclusion: I have long been saying that China' s economy will be the world' s best performer in 2009. Here are some of my recent entries on China' s recovery:

China turns to Chinese villagers rather than American consumers to boost economy


Optimism Growing In China

Chinese Consumer Spending Holding Up Extremely Well

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0 Responses to China’s Stimulus Plan Ignites Economy

  1. Anonymous says:

    Sounds like China is going to be building alot of "bridges to no-where". It's good China will be converting its massive foreign reserves to something that cant be wiped out with inflation but, investments in infrastructure don't necessearily translate into enhanced production. This is a page out of Roosevelts play book (who stole it from Keynes).

    It would be more positive if the Chinese were encouraging their producers to find other niche markets in countries that HAVE something to trade.

    They should be carpet bombing Russia, Africa, S. America and possibly India for suggestions on what they need for their domestic markets that China could produce.

    Domestic consumption would be alot more "healthy" if it was taking place at the consumers level instead of from a centralized government who considers politics instead of profits and costs. That being said, the Chinese are so much more productive then us at this point that when the seek to stimulate their economy they get alot more bang for their buck (or Yuan as it may be.)

    Right now, the more we spend, the stronger other countries get from providing us with the goods we need for expansion and the weaker WE get from the accumalated debt and sevicing that debt.

    This madness for us is coming to a head. The developing BRIC countries dont have the level of debt the G-7 has. They've had their currency crises, political instabilities etc. They will emmerge first from this.

    China JUST needs to get the new international currency right and it will be off to the races. If I were the premier of China, I would be approaching OPEC and devising a new "hard", commodity, based currency with a dollar conversion to new currency NOW while commodity prices are soft because they definitely wont stay soft for long considering all the supply, draugh,deleveraging etc. destruction at present.

  2. OperationNorthwoods says:

    Do you expect Japan's economy to be next best, after China? Do you expect China's economy to fare better than Japan's? Also, if there's a worldwide currency crisis, how do you think China and Japan would do once a new gold standard was created?

  3. Anonymous said...
    Sounds like China is going to be building a lot of "bridges to no-where".

    Actually, not really. China's service sector is very underdeveloped. For example, its train system was horribly overcrowded during the Chinese New Year's last month. So China's spending on infrastructure will be a lot more useful than Alaska's "bridge to no-where".

    Domestic consumption would be alot more "healthy" if it was taking place at the consumers level instead of from a centralized government who considers politics instead of profits and costs.

    Much of Chinese consumption is taking place at consumer level. China is removing its policy measures that were stifling consumer spending

    -----

    OperationNorthwoods said...
    Do you expect Japan's economy to be next best, after China?

    "Japan, like the US, has an industrial sector dependent on making big ticket durable goods (ie: cars) and capital goods, which tend to get killed in economic downturns. Since this is the most global slowdown since the great depression, demand for goods from "developed" nations like Japan and the US is plummeting much faster than demands for imports. As a result, trade deficits are exploding even in countries like Japan."

    "Everyone be warned: we have a situation where trade deficits in most "developed" nations are going to worsen while the willingness of emerging markets to finance those deficits is disappearing. Get your money out of the currencies of all "post-industrial" nations (those like the US which don't produce anything), and put it into physical gold or the currencies of emerging markets which are running large trade surpluses. I personally believe gold is the better bet of the two."
    Japan November industrial output falls 'off the cliff'

    "The same problem affecting the US is affecting Japan: a manufacturing sector concentrated in industries most vulnerable to an economy downturn. Unlike the US though, Japan has built up a large foreign reserve as a result of years of trade surpluses with the US. So while the outlook for the yen is negative, the currency will not suffer nearly as much as the dollar."
    Japan trade deficit explodes

    only Japan has a debt market larger than that of the United States. Japan's debt represents some 170 percent of its GDP, and it has a credit rating no better than that of the better-run states in sub-Saharan Africa. My advice: stay the hell away from the yen, if you know what is good for you.

    Do you expect China's economy to fare better than Japan's?

    Yes. Japan has outsourced its labor intensive and polluting manufacturing to China just like the US.

    Also, if there's a worldwide currency crisis, how do you think China and Japan would do once a new gold standard was created?

    here is a ranking of how I expect currencies to do, from best to worse:

    1) Gold
    2) Yuan, euro, swiss franc
    3) Yen
    4) British pound
    5) Dollar

    (The yen's fate also depends on how much gold Japan has leased out at America's request.)

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