Most people expecting China to be the leader of the global economy and the main engine that will pull the rest of the world out of the crisis we face today. It is true that the Central Bank of China often intervenes the market with impressive stimulus packages (in the first six months of 2009 these summed up to nearly $1.1 trillion) basically in order to finance companies participating in infrastructure constructions like transportation, housing, energy etc, and thus employing more people. Moreover, the Chinese stock market has shown signs of recovery (see Graph 1) with a rush for initial public offerings (IPO) from companies. According to Ernst & Young which is working on 108 IPOs this period, most of the offerings are by Chinese companies planning to be listed in China, Hong Kong or both.
Graph 1
Part of the reason China's stock market has soared is that Chinese companies have received so much cheap financing from banks enabling them to proceed with investments in the stock market mainly due to the lack of better alternatives. It is fully understood that the key parts of the Chinese economy and particularly the import-export factor, continues to suffer for the reduction in global demand. With low interest rates and a lot of cash sitting there, stock market continuous rise offers a valuable alternative investment. Is a new bubble emerging?
Moreover, I believe it is unrealistic to expect that China will be able to increase its domestic demand and consumption in order to cover its losses from global trade. China imports intend to feed its export machine and not solely used for own consuming. Consumers spending in clothing or electronics for example, are almost equal to consumer spending in other European countries like Germany or Italy. So why don’t we ask for Italy to save us? See Graph 2 and for homework try to imagine how the graph for the U.S would be illustrated…
Source: Merrill Lynch, “U.S. Economics, January 2009”
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