China's Stimulus Strength To Drive Decoupling Theory???

Published on Star Business, China’s stimulus strength

• THE Shanghai stock market has just overtaken the smallish Sri Lanka market as the region’s best performing this year, that is, in the last 1½ months.
  
  The Shanghai Composite Index rallied almost 20% in that short span of time, in contrast to the decline of 8% of the Dow Jones Industrial Average in the US during the same period.
  
  One of the factors for this “decoupling” in performance is the growing confidence in China that its government’s massive stimulus programme will be speedily implemented, with the full support of its banks under its command economy.
  
  On the other side of the Pacific Ocean, President Barack Obama’s stimulus package is still in its legislative process while the big banks are still dysfunctional and need to be propped up with enormous amounts of government aid.
  
  China’s stimulus package of US$600bil – amounting to about 14% of its gross domestic product (GDP) over two years, or 7% a year – is relatively larger than that of the US’ package of US$819bil, about 6% of its GDP over two years.
  
  There is also the small matter that China’s stimulus spending will be largely funded from the government’s budget surplus while the US will have to issue more government bonds or print more money.
  
  
  There are indications the Chinese stimulus is in full swing. Economists estimated record bank lending of over US$1 trillion in China last month, compared with US$5 trillion last year.
  
  It appears infrastructure contractors are raising working capital for jobs under the stimulus plan. That will also be supportive of global metal prices and shipping rates.

Oh no, yet another decoupling suggestion.

I really wonder.

Can China really consume all that they produce?

Mentioned in Chinese And Indian Shoppers Can't Substitute Missing US Shoppers

• Bank of China vice president Zhu Min forecast that Chinese domestic consumption will grow at about 20 per cent in 2009, the same pace as last year.
  
  On the other hand, he noted that US consumer spending is set to plunge 10 per cent, or US$1 trillion (US$1 = RM3.61), due to the financial crisis, as consumers are hit by falling home values and a credit drought.
  
  Americans normally spend about US$10 trillion domestically a year, or about 70 per cent of the US gross domestic product, estimated Zhu.
  
  In comparison, Chinese spend just US$1.5 trillion worth on goods and service, about 38 per cent of GDP.

Can China Adjust To The Lack Of Spending From US?

• Given that the US economy is about 3.3 times the size of China’s, and China’s trade surplus is roughly equal to one-half to two-thirds of the US trade deficit, the increase in Chinese demand needed to equilibrate the increase in US household savings is equal to roughly 10-15 per cent of China’s GDP. With consumption accounting for less than 50 per cent of China’s income, Chinese consumption will have to rise, in other words, by more than one-quarter. This is clearly unlikely.

Can the new infrastructure projects create enough job and wealth to substitute the missing US orders? Can it offer new jobs to the 20 million rural workers who lost their jobs? Yes 20 million people!!!! Ever wonder how small 20 million is? See 20 Million Rural Workers Lost Their Jobs In China!

Here are some excellent editorials from some really smart people.

• China Nears Recession Point As GDP Slumps
• China's Manufacturing Sector Continued To Contract In January
• All but the kitchen sink?
• Hooray! China has bottomed out.