China’s Economic Crisis

| November 10, 2008 | 0 Comments

This morning we awoke to an economic giant flexing its muscles.  The Chinese government decided to pump additional stimulus into their economy . . . $4 trillion Yuan worth. That’s about $586 billion US Dollars. They say they’re doing it to help the world, but everyone knows that’s a lie.

The real reason they’re spending so much money . . . more on that in a minute.

Part of the reason behind China’s action is their decision to follow in the footsteps of the global economic leaders.  Just last week we witnessed the latest battle in the credit crisis war.  Major amounts of stimulus were injected into the global markets by the largest central banks.

The European Central Bank (ECB) cut interest rates by 50 basis points. They’re trying to loosen up the credit log jam and stimulate greater economic growth.  The ECB was concerned about runaway inflation. That’s why they held rates so high so long.  Now CPI numbers are lower for the third straight month (indicating little threat of inflation) and the economy’s starting to contract.

As an example, Spain has been growing for more than 15 years.  This quarter they reported their first economic slowdown.

The ECB wasn’t the only central bank working hard.

The Bank of England (BOE) stepped up big slashing rates by 150 basis points.  This put the interest rate at 3% – a level not seen since 1955. Much like the ECB, the BOE is concerned about credit and economic recession.

Everyone follows the Fed.

Both of these actions followed the US Federal Reserve’s recent rate cut. They continue to flood the US markets with stimulus.  The $700 billion bank rescue package is starting to be distributed.  Everyone’s watching the credit markets closely.

So back to China.

China’s stimulus package held overtones of the great works projects the US implemented in the 1930’s.  Their plan calls for more roads, airports and increased spending on infrastructure.  But that’s not all.  Farmers will be getting support as will the health and educational sectors.

They didn’t leave anyone out; even high technology is getting part of the stimulus package.

What’s driving this stimulus?  If you listen to the PR folks, it’s their desire to help the world.  In reality it’s much more self serving.  Business in China is suffering.

Think about it.  Global spending is slowing.  Not only are we tightening our belts here in the US, but it’s happening around the world.

China exports many of the cheap goods the rest of the world consumes.

If nobody’s buying, then factories start to close and workers get laid off. It happens here in the US, and it certainly happens in China.  According to official estimates, growth slowed to its lowest levels in five years. Some are projecting economic growth in China to eventually fall to zero.

This presents a scary scenario.  If growth slows enough, and more and more factories close, large portions of their workforce will be unemployed.  And that can lead to one thing . . . civil unrest.

That’s the scenario the central planners in China foresee.  That’s the big fear.  They’re going to do everything they can to keep it from happening. Their first step is massive stimulus.  (This won’t be the last of the China Bailouts).

How does this impact you?

China’s a major global exporter.  Their economy is closely tied to almost every other country in the world.  If their economy starts to falter the world will feel their pain.  Much like when the US struggles so does the rest of the world.

This tells me the place for our investment dollars is in safe investments.

Overseas economies are going to be hurt much more than the US.  We may see a few currencies devalue in the coming months.  This will scare the rest of the world into safe investments.  And the safest investment is the US Dollar.

Now, don’t get me wrong, the US Economy is in a tough spot.  Factory orders, a measure of demand for manufactured goods in the US, fell 2.5% in September.  A clear sign companies are cutting back on spending.  The job market also reflects this cautionary view.  We’ve lost more than 1.2 million jobs in the US this year.  Amazingly 50% of them were lost in the last few months.

Despite these concerns the US Dollar will be one of the strongest currencies in the world.  Economic turmoil that’s rocking the US markets is hitting the rest of the world even harder.  And we’re seeing it in China right now.  This is a trend that will continue until global credit markets stabilize.

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Category: Foreign Markets

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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