We told you not too long ago why China's stimulus plan will change the world. The gist of our argument was that the plan finally showed the Chinese government's willingness to reinvest in its own economy, and to help the country along the long road to decoupling from the global economy.
It's been four months since then, and global economic data has only gotten worse. The Chinese manufacturing sector, which is the main driver of the country's economy and its inextricable link to the rest of the world, has continued to contract.
However, most recent data offered a glimmer of hope, showing that the rate of contraction is slowing. Against this backdrop -- or perhaps because of it -- Chinese Premier Wen Jiabao is set to announce a second stimulus package tomorrow at the annual National People's Congress. If the pomp and circumstance of U.S. politics is any guide, we can expect this second Chinese stimulus to be bigger (the first was $586 billion) and wrapped in ever more flowery rhetoric.
But will it do any good?
This is big news
The goal of these Chinese stimuli is threefold:
- Enhance the country's social safety net for workers who have lost their jobs.
- Finance infrastructure construction to create jobs and modernize the country for future development.
- Spur domestic consumption and start weaning the country off the low-cost export-manufacturing teat.
Now, those first two are common stimulus goals the world over. The third goal, however, is unique, dauntingly difficult, and potentially enormously transformational. If the Chinese can pull it off, then they will have put themselves well on the way to becoming the world's largest and most important economy over the next few decades. If they don't, China will become just another in a long line of failed challengers (the USSR, Japan, the EU) to the global economic dominance of the United States.
Back to "Will it do any good?"
The key to the success of China's stimuli is to make sure that the money is properly allocated between temporary stopgaps, such as road building, and initiatives that will have a more lasting effect, including low-cost loans for service and information economy entrepreneurs. If too much is allocated to propping up the manufacturing sector, then we will know that the government has caved to political pressure and focused too intently on the short-term fix.
In reality, the country must be willing to accept (or pay to cushion) further displacement in the labor market by allowing agricultural enterprises, remaining manufacturers, and other businesses to lower costs and increase productivity through automation. Only then will the Chinese economy be able to diversify and further decouple from the global downturn.
In the end, China's stimuli should help stabilize near-term growth, but only Wen's speech tomorrow and the next five-year plan will tell us what the long run has in store.
Who benefits?
Assuming that the near-term effects of the stimulus will be seen in infrastructure construction, there are clear domestic Chinese beneficiaries. They include HLS Systems
Yet the companies that supply the raw materials for projects such as this should also benefit. This means energy companies that sell oil into China, such as CNOOC
And if you really want to trek to the outer reaches of the benefits web (which is what we specialize in at Motley Fool Global Gains), take a look at something like Credicorp
All told, China's second stimulus plan is the big news this week in the emerging markets, but if, and only if, they do it right. We'll get more clarity on that tomorrow.
