In most people's eyes, last week's most important financial news came from Europe, where Mario Draghi and the European Central Bank indicated that they stood ready to embark on a brand-new form of intervention, buying sovereign bonds from weaker European countries to shore up bond markets and bring interest rates down to more comfortable levels. Despite a lack of details and uncertainty about exactly how the plan will work and when it will go into effect, markets responded favorably to the plan. At least for now, it looks like policymakers have averted a European meltdown.
But the news that may prove to be far more important for the global economy came out of China, where the Chinese government announced plans to do a far more traditional stimulus package. With plans to inject a trillion yuan into the Chinese economy -- about $150 billion at current exchange rates -- China hasn't hesitated to take dramatic action in an attempt to shore up sagging economic growth.
What's at stake
The plan actually sounds a lot like what some policy wonks have called for from U.S. lawmakers. Among the infrastructure improvements that China is proposing are the construction of more than 1,250 miles of roads, nine facilities for sewage treatment, two waterway projects, and improvements to five port facilities. In addition, 25 subway projects and other railway spending got approval from China's National Development and Reform Commission.
With China's GDP still growing at a 7.6% annual pace in the second quarter, all this spending may seem like a blatant overreaction to a fall in growth that seems inevitable as China's economy grows toward world dominance. But some analysts argued that the aggressive nature of the nation's stimulus marked an attempt to take care of potential future problems once and for all before they become harder to deal with.
Reawakening the dragon
The most obvious beneficiary of the move was the Chinese stock market itself. The Shanghai Composite, which has made a series of new three-year lows over the past several months, quickly bounced almost 4% on the news.
But the impact of a jump-started Chinese economy made itself felt across the globe. Materials stocks soared, with Brazil's iron-ore giant Vale (NYSE: VALE ) and copper king Freeport-McMoRan Copper & Gold (NYSE: FCX ) posting gains of 7% and 8.5%, respectively, on Friday. Coal stocks rebounded from their long decline, with Alpha Natural Resources (NYSE: ANR ) leading the NYSE's biggest gainers with a 17% jump and Cliffs Natural Resources (NYSE: CLF ) not far behind with a 14% rise. Even Frontline (NYSE: FRO ) , the shipping company long plagued by a global recession, managed to pick up almost 9% on the day in light of prospects for renewed economic activity around the world.
The bull case for all these stocks is the same: If China starts growing faster, it will need all the resources that those companies provide. That demand will support prices and boost profits at a time when most investors have expected a substantial slowdown.
Another thing to remember is that emerging-market stocks like Vale have gotten hammered on fears of a global slowdown. Given the U.S. stock market's resilience in the face of these pressures, it's worth noting that even after Friday's gains, Brazil's stock market remains down about 10% from its end-of-2011 levels, while India hangs near its starting value for 2012 after having given up very significant gains from earlier in the year.
From one perspective, China's move sends a mixed message. Just as no one should be really excited about the need for Europe to come up with novel ways to save the euro or about the Federal Reserve having to try yet another round of quantitative easing in a thus-far fruitless attempt to get the U.S. economy firing on all cylinders, the Chinese stimulus plan indicates that China's leaders are concerned about the nation's apparently fragile economic growth.
Still, given a choice between growth from intervention and no growth at all, most investors would pick the interventionist route. You just have to hope that the global economy will run out of bad news before policymakers run out of innovations.
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