Why China's Stimulus Plan Will Change the World

Why China's Stimulus Plan Will Change the World
By Bill Mann and Tim Hanson
November 12, 2008

Brazil's President Lula told his country in September, "People ask me about the [financial] crisis, and I answer, go ask Bush. It is his crisis, not mine."

Fifty days later, British Treasury Secretary Stephen Timms told a conference of G-20 nations gathered in Sao Paulo, Brazil: "We are in extraordinary times, the global economy is facing shocks which are wholly without precedent and we need a new approach. … It is a global crisis. It therefore requires an international response."

In other words, what goes around, comes around. Global schadenfreude toward a stupid and greedy United States and its subprime mortgage meltdown has rapidly become global concern about how to rescue the world from an all-encompassing financial disaster. Here's just a smattering of companies large and small that recently announced lowered outlooks for the year: Under Armour (NYSE: UA), News Corp. (NYSE: NWS), Starbucks (Nasdaq: SBUX), Vodafone (NYSE: VOD), Electronic Arts (Nasdaq: ERTS), ADP (NYSE: ADP), and Hormel (NYSE: HRL). (Yes, in these tough times, even the outlook for Spam is grim.)

And if that were not enough, the International Monetary Fund (IMF) recently lowered its outlook for the entire global economy.

One country's plan to step up
Against that backdrop, China announced a 4-trillion-yuan ($586 billion) stimulus package for its domestic economy this past Sunday. It plans to fund extensive infrastructure construction, aid poor farmers, and cut export taxes.

While China's plan has clear beneficiaries, and should help keep more laborers in their jobs and prop up domestic consumer spending, the most important (and underreported) aspect of the plan is how it will fundamentally change the economic relationship between the U.S. and China.

Here's how it was
One of the big debates over the past half-decade was whether China had reached a point in its economic development at which its internal economic gravity would allow it to "decouple" from the global economy. If so, it could continue along its fantastic growth trajectory, even as growth in the U.S. or Europe ceased or reversed.

That may sound like gobbledygook, but it's important. The U.S. has a $20 billion monthly trade deficit with China. It's funded by China's willingness to hold U.S. treasuries in its Central Bank (essentially, we're borrowing the money). China manages the arrangement by pegging its currency (the yuan) to the dollar at an artificially low rate, and by not worrying so much about certain niceties like environmental regulation and labor protection.

It's a mutually beneficial arrangement -- a weak yuan supports Chinese exporters, helping the country industrialize and quickly integrate rural migrants into its urban workforce, with the salutary effect of keeping inflation and potential political unrest low. For its part, the U.S. has gotten dirt cheap financing, by virtue of China parking more than a trillion dollars in U.S. government securities. That has supported the dollar and allowed the Federal Reserve to fuel consumer spending by keeping interest rates low.

China's stimulus package heralds the unwinding of this relationship.

Here's how it will be
This is why the decoupling argument matters. Many analysts have pointed to the thousands of factories that have shut down in China in these past few months as evidence that a slowdown in American spending will cause a depression in China -- potentially even leading to regime change. But in fact, our trade imbalance with China is artificially preserved by the aforementioned currency peg, and by the decision of China's state-run banks to make uneconomic loans to businesses it deemed worth propping up.

China has paid heavily for this relationship. Rather than invest its surplus cash in its own country, the Chinese poured money back into the U.S. to further spur our debt-fueled consumption. (Put less artfully, some poor Chinese guy in Shaanxi province was essentially helping you pay your mortgage.)

The announced stimulus package reverses that. Hundreds of billions of dollars that would have gone to propping up the greenback are now being reinvested in China, helping it to transition from its reliance on exports to a self-sustaining economy. So while China isn't yet decoupled from its export markets, this new spending plan will help it along that path.

What you need to do to survive China's huge currency reserves are about to be put to use, and while there will be some real and perhaps severe bumps along the way, the China that comes out on the other side will be a heck of a lot stronger, more independent, and more decoupled than the one we've seen up to now.

Chinese premier Wen Jiabao called his country's stimulus the "biggest contribution to the world." We don't know whether that's true, but we do know that China's ability to reach deep into its huge coffers to finance further growth gives it a significant advantage over the rest of the world's struggling economies. This is why we continue to believe in the Chinese miracle, and why we think more American investors should be taking advantage of this current temporary downturn to diversify their portfolios into previously expensive Chinese stocks.

We've recommended some Chinese companies at our Motley Fool Global Gains service that can help you do just that. A few of them are now poised to profit mightily from China's domestic bailout plan. You can read all about them by clicking here to join Global Gains free for 30 days.
Starbucks is a Motley Fool Inside Value recommendation. Vodafone is a former Inside Value selection. Starbucks and Electronic Arts are Stock Advisor picks. Under Armour is both a Rule Breakers and a Motley Fool Hidden Gems selection.

Bill is the advisor of Motley Fool Global Gains. Tim is a Global Gains senior analyst. Bill does not
own shares of any company mentioned. Tim own shares of Starbucks. The Fool owns shares of Starbucks and Under Armour. Since the fantasy football playoffs are approaching, the Fool's disclosure policy not-so-humbly requests that Braylon Edwards stop dropping the dang ball. Seriously, a fourth-grader could have caught some of those passes, dude.

Second Penang Bridge plan on despite delay

GEORGE TOWN (NST 2008-04-27): The Second Penang Bridge project is on track despite announcements that may have suggested otherwise.

Second Finance Minister Tan Sri Nor Mohamed Yakcop said the federal government would proceed with the RM4.3 billion project linking Batu Kawan in Seberang Perai Selatan and Batu Maung on the island.He said the government had wanted to review the construction cost, design and land acquisition process and not the project itself.

"Once these issues are resolved, we expect the construction of the bridge to proceed as planned but pending that, there will a delay in carrying out the project," he said after chairing the inaugural Federal Action Council for Penang meeting in Tasek Gelugor yesterday."This, however, does not suggest that the federal government is reviewing the project with an intention to scrap it," he told a news conference here after meeting his constituents in Teluk Air Tawar here yesterday.

Nor Mohamed said many quarters had misunderstood Prime Minister Datuk Seri Abdullah Ahmad Badawi's announcement that the project would be delayed and would be reviewed under the Ninth Malaysia Plan (9MP).Nor Mohamed, who is Tasek Gelugor member of parliament, said the main concern was to ensure that the design would reduce cost."We are also reviewing the entire cost of the project as we are facing a steep price increase in construction materials," he said.The building of the 24km bridge is expected to be completed by 2011.The deadline to complete the building of the bridge has been extended by nine months. UEM and its consortium partner, China Harbour Engineering Company, are building the bridge.

Nor Mohamed said the review was not subject to the Second Penang Bridge alone but to all major projects to be rolled out under the 9MP due to the rising cost of building materials."This global trend (price hike) has forced the government to adjust major economic policies as we foresee the situation lasting for the next few years."He added that the government was looking into ways to ensure that all projects under 9MP were carried out.

Meanwhile, Nor Mohamed said both the federal and state governments needed to work together for the proposed RM2.2 billion Penang monorail project. He said it would be difficult for the federal government to proceed with the project if the two governments did not co-operate."This is important because land matters are under their (state government's) purview. It would be difficult for us to implement the project."There must be understanding among us or it will be difficult to implement projects."Nor Mohamad did not elaborate on the help required by the federal government but added that it had no intention to put such projects in the state on hold."We have stated that we are sincere in bringing development, progress and prosperity to the people of Penang."

He said the government had yet to approve the monorail system and the Penang Outer Ring Road, another mega project."They are not in the list of projects approved under the Ninth Malaysia Plan."We have not come to that stage yet. "There are some matters relating to land acquisition which have to be settled," he said when asked to comment on Chief Minister Lim Guan Eng's statement that the state was keen to proceed with the monorail project.


NST 2008-04-28
He (LGE) said the project needed the cooperation and approval of the state government as it involved state land.
The RM1.2 billion monorail project is among mega projects under the Ninth Malaysia Plan that involves building a 51.2km track to complement the island’s public transportation network.