The bullish argument for China

Despite having made a number of bearish comments regarding China and its near-term outlook, I am a long-term China bull.  Even over the short-term, China’s willingess to fund long-term infrastructure projects will serve as a buffer against the massive downturn in exports as the economy tries to gain more omestic consumption demand.  On the whole, the government’s  increasing the social safety net will spur spending by Chinese who save to meet anxiety over economic prosperity during downturns.

In that vein, I am posting some bullish comments about China by analysts at Merrill Lynch and JPMorgan Chase (JPM 24.69 ↓5.73%) and other banks which Bloomberg News has picked up.  While I do not see China rebounding as robustly as these analysts, I do want to present the bullish side of the picture because China may well be the first major economy to recover from the global downturn.

I have highlighted some key points in the article to consider. A link to the full post is provided below.

China’s economy is showing signs that a 4 trillion yuan ($585 billion) stimulus package is taking effect.

The world’s third-biggest economy may expand 6.6 percent in the second quarter after slowing to 6.3 percent in the three months to March 31, the weakest pace since 1999, according to the median estimates of 14 economists surveyed by Bloomberg News.

China is trying to reverse an economic slide that has already cost 20 million jobs, raising the risk of social unrest as exports plunge and the property market sags. Spending on roads railways and housing has increased prices for iron ore, put a floor under industrial output and helped to drive a record $237 billion of new loans in January.

“China looks set to be the first major economy to recover from the current global meltdown,” said Lu Ting, an economist with Merrill Lynch & Co. in Hong Kong. “China is the only economy in the world to see significant growth in credit to corporate and household sectors after September 2008, when the financial crisis worsened to a near collapse.”

The government’s stimulus plan, announced in November, is beginning to gather momentum. Projects such as the building of 3.5 billion yuan of public houses in Shaanxi province and Shanghai began in December, while Shandong province started work on three new railway lines the same month.

China is committing about 1.2 trillion yuan of central government funds to the plan, which means banks’ willingness to fund projects is crucial. So far they are responding.

Toxic Assets

The value of new loans in January was more than double the record set a year earlier, according to figures released by the People’s Bank of China yesterday.

The lending multiplies the effect of the government’s spending in ways that wouldn’t be possible in the U.S. and Europe, where banks are burdened by toxic assets, said Dwyfor Evans, a strategist withState Street ( STT 27.00 ↓2.17%) Global Markets in Hong Kong.

While China is the only one of the world’s three biggest economies still growing, the expansion has slowed from 13 percent in 2007 and 9 percent last year.

Growth will accelerate from the current pace to 7.2 percent for the full year, according to Wang Qian, an economist with JPMorgan Chase & Co. in Hong Kong. Her calculation is that consumption will contribute 4.4 percentage points and investment 4 percentage points. The collapse in exports will slice off 1.2 percentage points.

Stimulus spending will contribute up to 3 percentage points of the total, she estimates.

Global Recession

Even if the global recession is protracted, China has the ammunition to maintain growth, said Merrill Lynch’s Lu. It has public debt of only 18.5 percent of gross domestic product — compared with 75 percent in India — foreign currency reserves of $1.95 trillion, and a balanced budget.

“China has perhaps the deepest pockets in the world,” said Lu. “It can relentlessly ramp up spending to create jobs and meet its growth target.”

The government-backed Purchasing Managers Index, a measure of manufacturing, showed a second monthly increase in January after a record low in November.

Source China’s Economy Shows Signs of Recovery on Stimulus – Bloomberg.com

Related Reading

China Shakes the World: A Titan’s Rise and Troubled Future — and the Challenge for America
The End Of Reform: New Deal Liberalism in Recession and War
The Man Who Loved China: The Fantastic Story of the Eccentric Scientist Who Unlocked the Mysteries of the Middle Kingdom
Subprime Meltdown: From U.S. Liquidity Crisis to Global Recession
Wild Swans : Three Daughters of China

Originally published at Credit Writedowns and reproduced here with the author’s permission.