Another Round of Drugged Economy in China?

There are greater signs of economy recovery in March from the depths of Q42008, but some observers are arguing that the Chinese policy stimulus could turn out to be insufficient and further stimulus may be needed. They argued that the drugged economy – via easy money, loose fiscal policy and easy credit will lead to further over-capacity, rising non-performing loans, falling profits or rising losses.

I think exports on one hand to remain weak in the coming months, but it may get stabilize and become less of a drag on growth as expectations, trade finance and de-stocking are showing sign of normalization globally.

I was told by some friends with investment in China that the economic stimulus is already translating into a rebound in investor confidence – an increase in orders and production in some metal products and rise in infrastructure-related investment. The power of this combination in driving investment-led growth should never be underestimated.

The next 4-5 months would be a critical period if the stimulus program works in China. It is usually will take at least 4-5 months between policy announcements and actual construction leading to increased final orders. Going by this count, the Q2 2009 is a period to watch for.

The $585 billion Chinese stimulus plan is already creating an estimated 100mn tons of steel with $220 billion to be invested in infrastructure such as railways, roads and airports, and $150 billion used for post-earthquake reconstruction in Sichuan. Currently, Chinese steel inventories are estimated at less than one-third of what is required.

China is going on a global shopping spree that capitalizes on global weaknesses and generally low energy prices. Major integrated oil companies are cutting back spending in the face of lower oil prices. Copper stockpiles in warehouses monitored by the LME dropped to their lowest levels since February 2 as Chinese imports of refined copper topped 300,000 tons for the first time in March. At least 75,000 tons of that copper is going to the government’s State Reserve Bureau stockpiling agency. China plans to stockpile aluminum, copper, zinc and lead for its metals reserves over the next 3 years.

Plus, China’s nearly $2 trillion in reserves is the largest stockpile on the planet and maintain over 34% reserves in proportion to its GDP compared to less than 5% in the case of the United States. And that means that China stands to be the most important long-term investment opportunity for years to come. The sky is the limit!