Message to China - Spend!

(By Richard Holway) I was quite pleasantly surprised at the significant and positive feedback I had as a result of my recent postings from China. I therefore paid special attention to today’s announcement that China was to spend some $600b (about a fifth of its GDP) on a stimulus package for its economy. Against a tide of really bad news elsewhere, this announcement single-handedly caused all global stock markets to rise. Mining shares were the main beneficiaries.

Back in 2000, I was invited to lunch at the Bank of England by the then Governor Eddie George. One of the topics of conversation was the problems with the Japanese economy. I remember Eddie quipping that we needed to export a load of British women to teach the Japanese how to use credit cards. The ‘problem’ with the Chinese, as I learnt on my recent trip, was that they too saved too much and spent too little.

The planned stimulus package will go mainly on new infrastructure building projects – hence today’s rise in mining stocks. Whereas what the global economy really needs is for the 1.3b Chinese to go out on a mass spending spree; which in turn would suck in exports. What the world needs is for China not to be a (cheap) manufacturing resource but a huge market for globally produced goods.

I doubt it will happen. As China’s growth rate slows significantly, I fear many repeats like the closure of its largest toy maker which occurred on the day we left. See my 19th Oct 08 post – It’s the same the whole world over – Part Two. Fear of losing your job will make the Chinese save even more – they already have the highest personal saving ratio to GDP in the world at c50% - the ratio is minus 2 in the US.