The Chinese government announced it would spend an estimated $586 billion by 2010 on a wide array of national infrastructure and social welfare projects, including constructing new railways, subways, power stations and airports to combat a domestic and global slowdown. With China’s gross domestic product (GDP) around $3.5 trillion this year, the stimulus is equivalent to 17% of its GDP. Whereas America’s $700 billion bailout package is only equivalent to 5% of US GDP ($14 trillion). The scale of action by the Chinese government demonstrates two key aspects. Firstly it underscores how rapidly the outlook for the world’s fastest growing economy has changed and how far and quickly the credit crisis has spread. Secondly, despite a faltering economy, the Chinese government has shown it is now a global economic force with huge amounts of capital at its disposal thanks to years of hyper-growth.
Impact of the Chinese Bailout on Global Markets
The Chinese economy accounted for 27 percent of global economic growth last year. So by keeping the world’s fastest-growing economy on track, the Chinese government is hoping to stabilize both its own and global markets. A feat which the American government and treasury has been unable to do. It is questionable how much success China will have on its own, but what gives me hope is the coordinated and simultaneous global action taking place to tackle this global problem. It was only during the last World War that nations came together so quickly and so unilaterally to tackle a problem of this magnitude.
The larger than expected Chinese economic stimulus should provide a big boost to stock markets over the week, particularly to the resource related companies who have taken a beating from plunging commodity prices. It should also help companies that sell or operate in China, particularly those in the infrastructure and energy space. Companies from my watch list that I am going to take a closer look at over the week are GE, BHP, Freeport McMoran (FCX), ABB and US Steel (X).
With some type of bailout/rescue plan in place by most major economies, there is hope that the credit crisis can be reigned in sooner rather than later. Undoubtedly there are going to be tough times ahead with a worldwide recession underway, but there is reason to have hope as these massive global rescue plans start to take affect over the coming months.