China Stimulus Package On the Way
by Jason Simpkins, Outsider Club
Headline GDP, factory output, property values, heavy-equipment sales, fixed asset investment…
All of these measures and more are painting an increasingly bleak picture of China’s economy. The slump has roiled stock markets (which were blown into a massive bubble) and spurred an emergency devaluation of the yuan.
Yet, the China’s economy continues to sputter. And that has policymakers weighing their options – including a multi-trillion yuan fiscal stimulus similar to the one deployed during the financial crisis.
According to the state-run Xinhua news agency, as much as 1.5 trillion yuan will be taken from government coffers to replenish the capital for investment projects.
The main focus will be on infrastructure development, such as roads and waterworks, to compensate for weakness in the real estate market and manufacturing sector. China has already reduced capital requirements for infrastructure investment projects.
UBS expects infrastructure investment will grow by 20% percent or more this year.
Furthermore, the package would boost commercial lenders, perhaps spurring another 7 trillion yuan of investment capital over the next three years. That could result in an aggregate increase of 3.4% of GDP.
Seven years ago China deployed a 4 trillion yuan stimulus package, which was enough to drive GDP growth from 9.2% in 2009, to 10.4% in 2010. Estimates suggest economic growth will come in below 7% this year.
Massive stimulus packages do come with a risk, however. The last one was largely responsible for major stock crashes, and huge piles of debt.
China’s economy has added $20.8 trillion in new debt since 2007, accounting for more than a third of total global debt growth in that period.
At 125% of GDP, China now has the highest level of corporate debt in the developed world. And the country’s state auditor says local governments have total outstanding debt of almost $3 trillion.
China has also devalued its currency, making dollar-denominated debts harder to finance.
So while stimulus may have positive short-term effect, it could exacerbate current bubbles or breathe life into new ones. Still, it’s likely to buoy commodities markets, as well as global stocks, for the time being.