The Other Stimulus

In the United States, we first debated the merits of any government-backed stimulus, and then expressed disappointment at its speed.  On the other side of the globe, China has been deploying their stimulus, reviving their economy and impacting economies around the world.   “Jiakuai,” or “Build it quick.”    The emergence of this new phrase was born out of putting the stimulus enacted by the Chinese government into place.  

Announced late last fall, the Chinese government announced a $580 Billion stimulus package through 2009 and 2010.  With its large account surplus, China can commit to this level of spending without a severe impact to deficit levels.   It remains one of the world’s largest government responses to the passing economic crisis.  Many analysts believe the stimulus size to be understated, taking into account other government and bank-financed projects aimed at spurring growth.  More important is the speed of fund distribution into the economy.   Although its difficult to quantify the exact amount spent, general consensus indicates that China moved with great speed to make funds productive.   The economist reported in March that total fixed investment is increasing 30% year on year.  In June, the World Bank raised its estimate for China’s GDP growth rate to 7.2% – and tying a full 6 percentage points of this growth back to the government stimulus.   That’s speed folks.  

A close look shows the stimulus to have benefits extending beyond the Chinese economy, reaching far to the shores of the United States.   American-based multi-nationals are getting their piece of stimulus spending.  Caterpillar’s CEO recently reported that sales for some products have returned to record levels and is benefitting from stimulus speed.  Last Thursday, September 10, China announced plans to build the world’s largest solar plant.  When finished, it will power an estimated 3 million Chinese homes.  It will be doing so with equipment supplied by First Solar, Inc., a company headquartered in Arizona.    Even companies outside the direct investment areas of road, rail, and power are expecting benefits (see Intel). 

The benefits of the Chinese stimulus go beyond stoking the earnings of American-based companies.  The massive scale of infrastructure investments is soaking up excess demand in the commodity sectors like Steel.  This results in more stable, less volatile global pricing for input commodities, providing a foundation for stability in the broader market.   And there are the benefits delivered to equity holders.  The Chinese equity markets have soared this year as a result of stimulus revitalization.  All markets being connected, this has boosted equity markets worldwide.  These benefits are tangible in the forms of increased wealth and, in these times, less hardship.  The benefits are also emotional as well.   When there is stability and growth, our desire to spend and our confidence in the economy increases.

When we look back on the recent economic crisis – and the systemic collapse that approached – they will likely conclude the event marked China’s passing a new threshold of global influence and leadership.  In the present, we can know that the steps taken by them have helped us avoid depression and recover sooner.