The Chinese Economy May Be Heading Into an Iceberg

Since China’s fiscal stimulus announcement in November 2008, the Shanghai Composite Index has rallied almost 90 percent, giving hopes that China may lead other countries into a global recovery. However, in this article we raise questions over the sustainability of the biggest emerging market upturn in history because eventually the Chinese stimulus will fade away.

Indeed, at Trading Economics, we think the unprecedented rebound in the Chinese stock market has been to some extent engineered by the Chinese government and not propelled by a positive change in real economic fundamentals. More importantly, the huge stimulus package has been mostly designated to boost the construction activity rather than provide help to distressed exporters or households. That said, the IPO activity has been mostly in construction industry and shares in property and building companies recorded the biggest increase. For example, the Sichuan Expressway stocks soared 300 percent during its opening trading day on July 27, while China State Construction Engineering Corporation surged 70 percent on July 29.

Furthermore, lower interest rates have increased credit availability and provided resources for extensive stock purchases. It is estimated that lending was up by more than 200% year-on-year in the first six months of the year. To make things even worst, investors desperate to make up previous losses have been supplying the market with a lot of borrowed money, driving the stock prices even higher. These special circumstances combined with crowd behavior and human psychology creates the perfect conditions for a bubble to expand and eventually implode bringing the global economy into a double-dip recession.

Anna Fedec,
7/30/2009 6:50:10 PM