China stimulus relatively five times bigger than US bank bailout

The $586 billion stimulus package announced by the Chinese government is mainly destined for infrastructure and real estate spending, and represents a huge nine per cent of GDP. By contrast the $700 billion US bank bailout is less than two per cent of GDP for the world’s biggest economy.

So it is quite clear that what China has done is actually more radical than anything the US authorities have done thus far to ease the global financial crisis. What will the impact of this huge spending package be on the global economy?

First, the package clearly supports higher levels of Chinese domestic economic growth than would have been evident without it. It means that the anticipated slowdown in the Chinese economy will be less than expected. Indeed, the stimulus is as big as GDP growth this year.

Commodity prices

That will be good news for basic resource producers for whom China is their biggest customer. Oil from the Middle East should command a higher price next year because of the stimulus package. Iron ore and coal deliveries from Australia will not slump.

But then that is most likely bad news for commodity price inflation that the US recession has been bringing under control, and inflation could therefore pick up quicker then expected.

However, what is not clear is whether this money will be diverted from foreign investments. Is that $586 billion less to spend on US treasuries at a time when the US is going to be borrowing heavily? That would be bad news for bond sales and the US dollar.

On the other hand, if Brazil, Russia, India and China are to take over from the US, Europe and even Japan as the engines of global economic growth next year this stimulus package is an important step to keeping that engine revved up. China is behaving both responsibly and in its own best interest.

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On the whole, this stimulus package is probably the most important positive piece of economic news this year. It should help to prevent a global recession becoming a depression, although there seems nothing left for any country to do to avoid a nasty global recession next year.

It is still going to take the developed economies a long period to sort out their financial systems and purge the excessive asset prices left over from the era of easy money. A lot of people are going to find that they are considerably less rich than they thought.

From an investment perspective I think this package makes Asia ex-Japan a buy as soon as global markets show a sign of bottoming out. It is also highly supportive of commodity prices, and precious metal prices that will surge again as the dollar resumes its long-term devaluation.
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