China's Stimulus Effect: Bounce or Recovery?

Rmb4 trillion of stimulus has started yielding results in China. Bank credits have expanded remarkably, re-stocking of commodities has pushed domestic prices at a significant premium to international prices, housing sector has stabilised - prices have turned around in a few places and stock market has outperformed peers. With the Chinese government striving towards 8% growth, hopes of China leading the world out of recession have risen. Is this the beginning of recovery or a bounce that may fade in the course of time?

Bank credits are growing at an alarming speed

Commercial banks disbursed Rmb1,890bn ($278bn) of loans in Mar09. With this, banks have given away Rmb4,580bn of loans in Q1 against government’s full-year target of Rmb 5,000bn. This is remarkable but unsustainable.

Growth in M2, the broadest measure of money supply, hit a record 25.5% in March, 8.5% higher than the government’s target annual rate. Compare this with the US, where M2 grew by 9.3% in Feb09. The central bank of China has sounded a note of caution recently but would eventually be guided by the government's desire to contain expansion.

An argument of an overdose of medication is quite tenable. Government, which was worried about civil protests and export slowdown led unemployments, pushed the panic button too hard. Hazards from a sudden surge in lending are being quoted privately by officials. Credit defaults could rise as abuse of extra-loose monetary policy is encouraging fraudulent activities including fake mortgaging. A possible seepage of money into the stock market shouldn't be surprising too. However, many of us may ignore these as natural by-products of good times.

Balm is not where the pain is

More than 20m rural migrant workers (about 15.3% of total migrant workers) in China lost their jobs due to export slowdown led business closures. Compare this with 5m job losses in US since the recession began. In the southern province of Guangdong, China’s biggest manufacturing and export hub, exports fell by 20% in Feb 09, albeit slower than Jan's fall of 31%.

Chinese government has tried to offset by doing what they do best - pushing up investment demand by identifying new projects, bringing forward some old projects and creating commodity reserves. Strong investment growth has been the hallmark of Chinese GDP growth in last two decades. Urban fixed asset investment (FAI) grew by 25.5% in 2008 and 26.5% in Jan-Feb 09. Government targets 20% growth this year.

While such initiatives help restoring some jobs, these have been far from fully offsetting the loss. Besides, without participation from private sector, which awaits recovery in exports, fading effect could be visible soon. Analysts crave for domestic consumption growth as a sustainable solution - this could, however, take long time.

Housing sector is stabilizing

Cheap credit to consumers and builders has helped increasing transaction volumes and stabilise housing prices recently. After seven months of m-o-m declines, average urban housing prices rebounded 0.2% in Mar09. Demand for urban residential properties rose by 8.7% in Q1 - a sign of bottoming out for many. However, it seems too early to conclude.

Chinese house prices have trebled between 2003-2008 and have fallen just 1.3% y-o-y in Mar09. In other words, house prices have not corrected as much as those in other countries including India and Brazil. Cao Jianhai, professor at Chinese Academy of Social Sciences, a government think-tank, recently told the Financial Times that he expects average urban residential property prices to fall 40-50% in next two years. This could be well in line with the rest of the world.

Demand for houses has a direct correlation with job assurance, which has taken a jolt. It is difficult to see restoration of lost jobs anytime soon without recovery in western economies.

Surprising commodity demand

The stimulus-led push to infrastructure projects has pulled-up demand for commodities in China. While a seasonal rise after Chinese Near Year in Feb is a quite typical yearly phenomenon, the spike has been remarkable this year. China's total copper imports surged 41.5% to a record in Feb09, beating expectations. Strategic Reserve Bureau (SRB) has bought metal stocks from producers, traders helping them to survive and retain jobs. Rumours of larger stock-building by SRB has pulled traders and consumers out of their comfort zone and re-stock. This frantic change in outlook has not been replicated in western countries where demand for commodities continues to struggle.

Those who watch metals closely, have seen Chinese metal prices trading at a large premium to international prices despite record imports recently. This positive arbitrage continues to push international metal prices higher (as I write) and pull metals from around the world into China - including metals like Aluminium which China exports on a net basis.

To me, such a regional phenomenon is not sustainable unless supported by a global theme. The world can't lean on China beyond a point.

Conclusion

China has set an example of investment growth-led recovery, once again. While strong financials of commercial banks helped implementing monetary policies quickly, direct intervention of government through several agencies was quite instrumental. However, a steep fall and then a V shaped recovery seem too nice to be true, hence the skepticism. Without being complacent, the government needs to keep the engine hot until recovery in western world takes over - this is not a small task and many would argue whether it is doable and about its ill-effects. The longer the rest of the world takes to revive, the lower the probability of the new found happiness to prevail. For those who do not believe in decoupling, the current rally could soon be lost from our short-term memory.

Disclosure: No position

Comments

[CautiousInv...:]

I tend to be optimistic about China but in looking at the generally favorable statistics it must be borne in mind that it is still a command economy.

When banks are instructed to lend.......they lend. Similarly, when state enterprises are told to construct or build..........they construct and build. One fear is that excess capacity will result from these investment initiatives, while another fear is the credit worthiness of the borrowers and the underlying economics of the projects.

Over the long-run, China must develop a strong middle class with access to incomes that allow China to become more consumption driven and less reliant upon exports.

Apr 19 09:41 AM

[ed233:]

If you look at the recent statistical reports coming out of the traditional consumer countries it is not difficult to determine that demand for all types of durable goods has been flat and it looks as if this trend will continue at least for the rest of 2009 and perhaps into 2010. When job security is in jeopardy a whole differerent psychological mind set comes into play. This mind set compounds what is already economic stagnation for the global economy. Householders who are still working will reign in their spending to protect assets and to put food on the table. Add to that the increasing taxes being imposed at lower governmental tiers. Add again to that neighbors seeing neighbors one after another losing their home and declaring bankruptcy. Is it natural at this time to be optomistic buying into companies that are literally falling off a cliff? I have my opinion but it's the media's opinion that bothers me most. Media types look for the tiniest bit of good news (green shoots) to signal that the crises will be history shortly and good times are just around the corner. The present enthusiastic investors think the corner is just about upon us(V shaped) But really, how big is this corner that everybody is talking about. Remember nobody wants to be a bearer of bad news especially employed news casters, media opinion guests and banking economists who are paid to spin a positive pitch. Remember these people are working and have an interest to be optomistic. Why don't we hear more from real grass roots economy types? What are these tea parties telling us? You always learn more from what is going bad than from what is percieved as going well. We must always keep our sight on reality. This can be difficult because it requires us to rely upon government reports and independent research groups whose material facts are sometimes buried, sometimes restated, sometime blatently before our very eyes. It doesn't matter who tells us these facts. Still in light of the existence of those facts we seem to prefer to believe opinion super star media types who say ,"Well it's a little better than our expectation!!" I say we could be literally falling off a cliff and someone from the media will always retort,"Remember we told you it was going to be bad. That cliff was only 198 feet down. Our expectation was for 200 feet." That to me is small comfort. It tells me that if I go down 198 feet the chances are just as great for me to be killed than if I fell 200 feet. So lets not kid ourselves. Remember where the source is coming from. LOL only looking after your money.

Apr 19 11:39 AM

[Dustinian:]

The CCP should take an even harder stance on financial fraud, given the recent spate of cases, as well as the abundance of lending. A campaign similar to their quite effective campaign against corruption is needed. Obviously in a country such as China there is corruption, but far less.

I am quite optimistic about Chinese economic progress. CautiousInvestor's warnings about the potential inefficiencies and excesses which arise from a command economy are valid and must be kept in mind. however, the Chinese are far smarter in these respects than the Soviets, for example, and command economies also have a great capacity for increased efficiency compared to our own economic/political system.

Apr 19 12:40 PM

[Alan Young:]

Mr. Daga, you use words like "panic" and "frantic" to judge China's policies, but in fact the policies appear to be quite rational. If you have evidence that the government is on the edge of losing control, as implied by your choice of language, you ought to share it.

I agree with Dustinian's conclusion.

Apr 20 03:04 AM

[huangthomas:]

The impact of the current world financial crisis on China is mainly due to plummeting export to developed countries. The external demand is beyond Chinese control and it takes time to whip up domestic demand and consumption. Since export accounts for 20 to 30% of GDP growth, the GDP growth drops from official goal of 8% to 6 - 7% range is to be expected. Q1, 2009 GDP growth of 6.1% is still a healthy and respectable number. It always takes time for the society to adjust to a new situation. In a time like this, higher expectation is unrealistic.

GDP number does very little to the unemployed, low-skilled migrant workers. There are 20 to 25 million of them. Chinese government carried out a series of social welfare programs, such as subsidy and financing for purchase of electric appliance, water heater, air-conditioner, bike, motor bikes.....etc. These benefits are only for the farm land residents to make them happy while waiting for the economy to recover.

Apr 20 01:14 PM

[M.R. Henderson:]

can you point to any "farm land resident" financing programs? how are these working? the domestic consumption stimulation i see is through work units.


On Apr 20 01:14 PM huangthomas wrote:

> The impact of the current world financial crisis on China is mainly
> due to plummeting export to developed countries. The external demand
> is beyond Chinese control and it takes time to whip up domestic demand
> and consumption. Since export accounts for 20 to 30% of GDP growth,
> the GDP growth drops from official goal of 8% to 6 - 7% range is
> to be expected. Q1, 2009 GDP growth of 6.1% is still a healthy and
> respectable number. It always takes time for the society to adjust
> to a new situation. In a time like this, higher expectation is unrealistic.
>
>
> GDP number does very little to the unemployed, low-skilled migrant
> workers. There are 20 to 25 million of them. Chinese government carried
> out a series of social welfare programs, such as subsidy and financing
> for purchase of electric appliance, water heater, air-conditioner,
> bike, motor bikes.....etc. These benefits are only for the farm
> land residents to make them happy while waiting for the economy to
> recover.

Apr 21 04:28 PM

[huangthomas:]

This is through "resident registry" , also know as "hu-kou". The 10% subsidies extend from domestic electric appliance to motor bike and a $5,000 to 6,000 dollar cars. I suppose this is what most farm land residents can afford. That is why there is a burst of car sale in china. A lot of them are unemployed and cannot go through work units.

Apr 22 06:40 PM