Supply, yes, Demand No: Problems with Chinese stimulus Package

Chinese investment statistics were reported. Assuming accuracy, it shows a large increase in investment, which proves that the stimulus package went right where I predicted, into investment by large state owned enterprises and into speculation in the market and real estate. So the Chinese government has been successful in stimulating the supply part of the equations. This undoubtedly has had an effect on commodities prices as these firms increase the demand for commodities.

Unfortunately, the stimulus package has not addressed the demand side. Chinese exports have not kept up since the world is still deleveraging. The Chinese have tried to stimulate the domestic demand through subsidies which are relatively small compared to the wall of money going toward the investments. The process is not sustainable. The brunt will be felt by the banking system as more unsold goods pile up, the bad loans will go up and prices will go down.

Most likely policy will be more of the same, as the Chinese hope that an end to the recession will increase demand. If the recovery is jobless and consumers continue saving and reduce spending, it won’t help. Also by increasing the demand and price for commodities and slowing the recovery, the Chinese policy is counterproductive.