Monday August 31, 2009 - 22:44:10 GMT
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Le a Hundred Credit Lines Bloom
Have the Chinese engineered a spectacular economic recovery, the
envy of the industrial world or has Beijing created a version of the American
housing and credit bubble of the past decade?
The China jury is still out. But despite the evident confidence in
the mainland story shown by the commodity and currency markets there are
worrying signs that the end of the government stimulus spending will seriously
dampen the Chinese economic resurgence.
When the Chinese Government
announced their four trillion yuan stimulus package ($585 billion, 14% of GDP)
last November the world economy was in the acute phase of the financial crisis.
Lehman Brothers had just collapsed and falling equity markets would continue to
plummet for another four months. The United States had just elected Barack Obama
President but he would not be inaugurated until January 20th and any fiscal
rescue package for the US economy would have to wait until the new
administration and Congress took office.
With the industrial west in
financial crisis and western governments already running large deficits the
world looked to China for a possible solution. The Chinese Government could use
its large cash reserve to reinvigorate her economy. Chinese consumers might then
be willing to substitute their own domestic consumption for the exports that
were no longer going to their straitened comrades in America and Europe.
China had all the necessary qualities for a successful stimulus: a huge
and urbanizing population, a large hoard of disposable cash and a government
both willing and pressured to keep its restive population happy with jobs and
Fourth quarter economic growth in China had dipped to 6.1% but
it came roaring back to 7.9% in the second quarter. Though just under the
semi-official goal of 8% that the Beijing government is said to keep as the
lower acceptable limit for economic growth, recovery in such a short space of
time was a triumph of central government action. But the particulars of the
expansion are less than reassuring. Growth appears to be dependant on continued
government spending and some aspects of recent economic developments are
sensible of bubbles in the stock and perhaps housing markets.
Chinese economic growth is still largely determined by her exports. If the
demand for imported goods in the United States and Europe, the Middle Kingdomâ€™s
most important markets, does not resume, will Chinese domestic consumption be
sufficient to absorb the products of Chinaâ€™s factories and maintain Chinese
Chinese exports have recovered slightly. In July the trade
balance rose to $10.63 billions from Juneâ€™s $8.34 billions. But this yearâ€™s
first and second quarter averages, $20.84 billions and $11.62 billions
respectively are a far cry from the $38.10 billions and the $27.78 billions of
the fourth and third quarters of last year.
Despite the Beijing
Governmentâ€™s public goal of increasing domestic consumption, purchases by
Chinese households constitute a similar percentage of the economy as they did
five years ago. Non-governmental or private consumption was $1.6 trillions in
2008; by comparison private consumption was $7.4 trillions in the EMU and $10
trillions in the United States. It will be difficult for China to replace
western consumption with her own from such a small domestic base. In addition,
from a timing vantage private consumption cannot be augmented in the same rapid
and ordered fashion that governmental spending can. Not surprisingly the bulk of
the Chinese stimulus money has been directed through state organizations and the
Most of the fiscal stimulus to the economy has been provided by
loans from the Chinese banking system. New loan commitments have increased by
over $1 trillion in the first six months of this year, a 28% rise year over
One result of the loan cash disbursement had been a boom in the Shanghai Stock Exchange.
From the end of last year until early
August the SE Composite rose more than 80%. This rapid price increase
raises the possibility that money finding its way into the economy is being used
in pursuit of a quick speculative return rather than buying consumer goods or
placed as investment in productive assets like factories and stores.
Shanghai SE Composite has fallen 23% from
the August 4th peak, including 2.9% on
Friday and 6.7% on Monday. This
precipitous fall and the reason for the drop, the news that bank lending had
fallen again in August after a steep decline in July, were indications investors
are worried that if the available cash dries up the market might have no other
The government has supplied subsidies to rural and urban
families for the purchase of household electrical goods. But this type of
program can only provide a temporary fillip in consumption and a stopgap for the
domestic manufacturing sector. When the subsidies expire local demand will tail
off because there has been no change in the job outlook for Chinese workers.
Anecdotal evidence from housing markets in various parts of the country
also point to the return to home purchase as a speculative investment, as prices
in some urban areas have gained substantial amounts since the stimulus cash
began flowing. Car sales also have been strong with China recently surpassing
the United States as the worldâ€™s largest auto market.
There is as yet
scant evidence and little historical reason to believe that the Chinese stimulus
spending has created the necessary conditions for a permanent expansion of
domestic consumption, regardless of the dramatic improvement in official
There are two places for Chinese factories to sell
their goods, at home or abroad. Unless there is an unexpected revival of
consumer spending in Chinaâ€™s export markets, it is unlikely the stimulus has
created enough stable domestic consumption to absorb the production of Chinaâ€™s
factories. Without exports Beijing may soon face the need and the dangers of
another round of stimulus spending.
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