The China house of cards - Part II

China's stimulus package included a strategy to unlock China's massive personal savings. This reliance on domestic demand to help pull it through the global economic downturn and reduce civil unrest is ill founded. China's problems differ greatly from that of developed nations, and can have serious ramifications.

China's consumer economy cannot be compared with that of developed nations. Its economy is reliant on exports and ongoing construction of infrastructure to meet demand from ever increasing global consumer economies with no provision for a decline. It was always bound to fail.

The stimulus package

China’s stimulus package is equivalent to US$856 billion and includes about US$4.5 billion in subsidies over two years to promote sales of domestic appliances and other items including cell phones, computers, cars, and motor cycles.

But the strategy is not just to drive domestic demand. China's overcapacity is producing massive inventories of consumer goods unwanted by export markets, translating into billions of dollars and looming corporate failures. These inventories include many electrical appliances incompatible with China's electricity supply. Many vehicles for export incorporate engines that risk damage if using China's low quality fuels.

Beijing's aim is to convert inventories into cash to prevent embarrassment for the government and the failure of some of China's new brand icons and state-owned enterprises.

China's savings

China's Ambassador to the United States, Wu Jianmin, proclaimed that China's domestic savings total US$3.5 trillion and that this massive source of disposable income will help China overcome the impact of the global credit crisis.

Simply averaging the savings equates to the equivalent of about US$3,000 for every man, woman and child in China, but in China averages can be meaningless and misleading.

Overlooked was the fact that China's rural sector had the biggest level of savings while the urban sector had vigorously embraced the western consumer's obsession with self-indulgence, credit cards, and debt.

Urban sector savings plummeted as debt ramped up in response to the promise of fuqiang (wealth and power). The vision of this highly leveraged urban sector was shattered; first by the stock market crash and then the recession, decimating substantial proportions of the aspiring nouveau riche wealth and leaving many in a sea of debt.

The target of the subsidies is the vast rural sector.

A government out of touch

The 13 per cent, US$4.5 billion subsidy intends to give farmers and lower income earners the opportunity to afford household appliances.

It is misguided and ill informed.