By Keith Fitz-Gerald
Money Morning/The Money Map Report
It's easy to be gloomy when it comes to the financial markets.
It's even easier to write off China.
After all, the Red Dragon's markets have collapsed by 70%, businesses are shutting down, lead-laced toys and poisoned medicines have tainted the minds of Western consumers, there's a growing gap between the rich and the poor, inflationary clouds seem to be gathering, and overbuilding is a growing concern.
And that's just a partial list.
The situation has gotten bad enough that China's economic growth rate may slow from 9.6% this year to 7.75% in 2009. For those who are struggling to find the "next" profit opportunity at a time when the U.S. economy is straining to maintain any bit of forward momentum possible, those statistics should serve as a gigantic neon arrow over a lighted sign that reads: "Invest Here."
Simply and succinctly put: U.S. investors are unlikely to ever see this kind of growth here at home ever again.
On the other hand, China is much like America was at the dawn of the Industrial Revolution. Sure, there are problems – and, admittedly, it's easy to focus on a whole slew of them right now – but there's still all kinds of potential, too.
If you've ever been to China, you know exactly what I'm talking about. You literally can feel the broad sense that the best is yet to come. Contrast that with the United States or Western Europe, where hand wringing, and finger pointing are the norm.
Why is that?
Because, as I mentioned a few weeks back, Beijing "gets it." And China's central government is taking major, decisive steps to ensure that China's people do, too, an admirable example of the kind of leadership that Washington's self-absorbed politicians seem no longer capable of delivering. Most recently, as Money Morning reported, Beijing approved a $586 billion stimulus package. In an era of trillion-dollar bailouts, that was almost too small to register on the old Richter scale here in America. But it should have.
If America were to put in place a stimulus plan that represented the same proportionate outlay that Beijing's will for China, we'd be talking about an infusion of nearly $1.83 trillion, or 10.89 times more than the positively puny $168 billion stimulus that went into the hands of U.S. taxpayers last year. And it would probably dwarf anything that President-elect Barack Obama is contemplating right now.
Think of the pile-driver-like effect a stimulus of that size would have on U.S. consumer spending – which, after all, accounts for 70% of what the American economy does. Billions of dollars in loans could be paid off and consumer debt retired. In that sense, such a massive capital infusion could do what U.S. Federal Reserve Chairman Ben S. Bernanke and his Bailout Boys can't achieve. The Beijing-like infusion would provide a needed recapitalization of the financial markets – without rewarding those who got us into this mess in the first place. Most important of all, it would help the folks who are caught in the middle – us consumers.
What makes this particularly ironic is that the nature and composition of China's stimulus program suggests that Beijing's communist government understands consumer psychology and capitalist financial markets better than Western governments do right now – particularly the psychology.
For example, because of the credit crisis and relentless coverage of the flagging economy, consumers are scared stiff at the moment. And understandably so. They see factory orders declining and jobless claims spiking to their highest levels in 25 years. They read the news that retail stalwart Wal-Mart Stores Inc. (WMT) – is lowering expectations. So consumers opt to hoard money out of fear, rather than spend it, and that's what really kicks a recession into gear.
So what will China's stimulus package do that ours won't?
For starters, Beijing's stimulus is designed to encourage spending, rather than reward malfeasance, as our bailout plan is doing. Further, there's no buying up of bad debt. Instead, there's an implied recapitalization that will take place through growth. But most importantly, Beijing is sending an ultra-clear message to its people – we will be here for you and we will help you directly – and that's stoked the confidence in every Chinese contact I've talked to since the plan was announced.
And that uptick in confidence is warranted, given all that China is planning, including:
- Improved environmental-protection projects, including new sewage and waste treatment projects.
- More low-rent and affordable-housing projects.
- Distributed healthcare projects, including hospitals, clinics and medical equipment, particularly in the historically ignored rural regions.
- New highways that will more than double China's navigable area and that will account for nearly 40 million new jobs in the next 24 months.
- New railways and railway-related projects, which will create 6 million jobs during 2009 alone and more after that.
Beijing's stimulus is geared toward creating 3.0% to 5.0% gross domestic product (GDP) growth to augment the 3.0% domestic-consumption activity, for a total 2009 target growth rate of at least 7.0%.
While China's stimulus is designed to create valuable growth, the U.S. package is simply concerned with plugging leaks. China's package is forward-looking, while ours is not.
Clearly though, the effects won't be immediate and Beijing knows that. And that's why, based on historical trends, we expect it to be about six months before the money really begins to work its way through the system. Look for an uptick in Chinese demand in late 2009, and acceleration in 2010.
Look, also, for the worldwide ripple effects, particularly for commodities producers and exporters that do business with China, and the infrastructure providers. This package will stop many of these sector skids, and we can look to see them rebound in earnest once demand kicks in and the Renminbi (yuan) start to flow.
Let's hope that the rest of the world gets the message. Washington's current bailout plan isn't large enough to restart the global markets and it sure as heck isn't large enough to recharge investor psychology.
But China's plan is. And that's what Washington should be looking at.
News and Related Story Links:
- Money Morning News Analysis:
Massive China Stimulus is Viewed as an Attempt to Help the West.
About the Author
Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.