China's Stimulus Boosts Confidence

05/04/2009 10:54 am EST

Focus: MARKETS

Jim Trippon

Editor-in-Chief, China Stock Digest

James Trippon, editor in chief of China Stock Digest, says China's stimulus plan has sparked spending among China's consumers, who are also confident about the future.

It would be an understatement to say that Beijing has been flooding the economy with money. In the month of March alone, new lending by Chinese banks surged to a record high of 1.8 trillion yuan. That's an astonishing tenfold increase in monthly lending from October of last year.

While US banks have in some cases reduced their lending since receiving government assistance, China's banks have done exactly the opposite: Lending has exploded during the first quarter of 2009. New loans for the first three months of the year jumped to 4.58 trillion yuan, nearly equal to the 4.9 trillion yuan new loans issued in all of 2008.

Converted to US dollars, this government-mandated lending has topped $670 billion, [exceeding] the $586-billion stimulus injected into the Chinese economy last November. New loans are expected to easily exceed one trillion dollars this year.

Although some economists are worried about the danger of creating a bubble or sparking inflation, international banking analysts believe that the surge could add two [percentage points] to China's GDP growth for the year. Sources in China's securities industry say that a second round of economic stimulus will be coming out of the pipeline during the second quarter of the year.

One of the challenges facing China during the Great Recession is boosting domestic consumption in an effort to make up for declining exports to Western nations. The Chinese people are habitual savers and new bank deposits have risen by approximately 25% during the current liquidity boom.

China wants those savers to start spending, and it's devised a host of strategies to get the people to open their wallets. Bank interest rates have already been cut below the inflation rate, giving savers a strong incentive to use their money rather than lose it. Low interest rates also mean cut-rate mortgages, and property transaction volumes have surged across the country.

As real estate sales boom, so has consumption. Retail sales grew by an impressive 15% during the first quarter of the year to 2.94 trillion yuan, or $430 billion. A survey of marketing executives in China by Hill & Knowlton and Millard Brown found that 75% are bullish, with most predicting a return to a booming economy for Chinese consumers by 2010.

Chinese consumers are also feeling bullish about their prospects. A study by N-Dynamic Market Research found that 45% of Chinese on the mainland feel that the national economy has been getting stronger, despite export-driven layoffs. By comparison, N-Dynamic found that only 8% of respondents globally felt confident about their economic prospects. A separate study by Nielsen also found "big optimism" about the future.

Subscribe to China Stock Digest here.

Related Articles on MARKETS