The Chinese have announced a massive $586B stimulus bill. Unfortunately, this bill appears as misguided as our own stimulus bill – though in different ways. The biggest driver in China’s recent economic boom has been exports – primarily to the U.S. Obviously, exports have fallen off a cliff as the U.S. consumer slows down. The other main driver of GDP in China has been real estate. Though not as bloated as the U.S. or the U.K., China underwent a real estate bubble from 2003-2007. Prices more than doubled in a few years as the poor moved out of rural China into the more densely populated regions.
In a horribly misguided attempt to drive domestic growth, the Chinese government is implementing a housing infrastructure program as part of their stimulus bill. The idea is to create jobs and housing. I believe the idea could backfire on them. China needs lower supply of housing – not higher. This is likely to cause an inflation problems as China’s credit markets remain intact and an unnecessary stimulus bill injects funds into an economy that already has excess liquidity.
I still maintain that China and Asia will be the growth engine that pulls us out of this crisis, but these are short-term answers to long-term structural problems. Although the market has cheered the recent moves by the Chinese government I believe they are even more misguided moves than our own….While this will all help in generating a near-term boom in economic growth it’s likely to create more long-term instability.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.