(This guest post originally appeared at the author’s blog)
If you think the stimulus based rally in the United States is impressive you should see the stimulus in the pipeline in China. A recent report from Nomura Securities says the stimulus based recovery is only just getting started and is likely to peak in mid to late 2010. That means the liquidity fuelled rally in stocks might not be close to finished and adds credibility to SocGen’s theory that China will be a bigger bubble than Japan.
Many investors have voiced concerns over the front-loaded package, but the 4 trillion RMB package will actually pay more in 2010 than it did in 2009 as it the stimulus is drawn out over a longer timeframe. Nomura details the investment:
China’s investment stimulus is unlikely to fade soon because much of the investment is for massive multi-year government infrastructure projects. The amount of funds in motion is much larger than the originally mooted RMB4.0trn. The calculations are straightforward: According to the original plan, RMB1.7trn was to be funded by central and local governments, while the other RMB2.3trn was to be largely financed by the banks (see “China’s stimulus: A confusing package”, Global Weekly Economic Monitor, 20 March 2009). Since the plan was to be implemented over a two-year horizon (2009-10), this means that a maximum of RMB1.15trn in additional bank loans per year would be needed to reach the original planned target. Yet loan growth in the first eight months of this year has already exceeded RMB8.0trn, of which RMB4.0trn was on medium- and long-term corporate loans (compared with only RMB1.9trn for the whole of 2008). As private sector investment is known to have been lacklustre so far this year, the majority of these bank loans can therefore be expected to be directed at stimulus projects. Based on these numbers, we estimate that the total planned investment amount of the stimulus projects started so far exceeds RMB7-8trn. These projects will likely last longer than the originally slated two years. So will the investment boom, in our view…. and a massive amount remains in the pipeline.
Although the monthly injections are set to peak in 2009 the annual payment in 2010 will actually be about 40% larger in 2010 than it is in 2009:
Adding fuel to the fire are signs of life in the global economy. Private sector investment is starting to pick-up in recent months and could only add to the investment boom.
In addition to strong public investment, private sector investment has also begun to pick up recently. For example, property investment growth surged to 34.6% y-o-y in August from 19% in July (and from 1% in January), returning to its growth range in 2007 and 1H 08. Meanwhile, FDI inflows into China rose by 7.0% y-o-y in August after falling for seven months in a row, reflecting renewed confidence on the part of foreign investors as the V-shaped recovery unfolds. We expect the recovery to gain more momentum, forecasting real GDP growth to reach 11% y-o-y in 4Q 09 and 13% in 1Q 10. As it does, and more demand for consumer and capital goods is created in the process, we believe that private sector investment should pick up further.
If you think the stimulus based boom in the U.S.A. has been impressive just wait until the Chinese stimulus plan picks up full steam in 2010. The 82% rally in the Shanghai Index is likely to continue as government stimulus expands. The outperformance of the emerging markets and the reflation trade could very well have fuel well into 2010. After that, governments and central bankers will likely be forced to deal with an asset bubble and the extraction of liquidity on a scale that is truly unprecedented…..The global printing press isn’t only causing massive potential problems in the U.S.A. – this is a global issue. Let’s just hope that the boom/bust policies of the Federal Reserve and the Chinese government don’t lead to massive long-term problems. I fear we’re quickly approaching the point of no return with regards to extracting government liquidity…..
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