Weekly international investment round up to 11 November 2008
Following in the footsteps of America and Europe, China has also now announced their huge economic stimulus package and an additional cut in interest rates, the third in two months, in order to boost their slowing economy sending shares higher throughout Asia on Monday.
The announcement is significant because based on International Monetary Fund figures China accounted for over a quarter of the entire global economic growth last year so any sizable slowdown there this year would have negative repercussions for us all.
With bank after bank announcing so many billions in bad debts being written-off or that ‘such-and-such’ a government has launched another fiscal stimulus package worth ‘X’ amount an undesirable consequence of the credit crunch is that the words ‘billion’ and ‘trillion’ seem to have somehow lost their real meaning and that we are all becoming immune to the real worth of another announcement, but this latest unveiling of a 4 trillion yaun, worth approximately $586 billion US dollars, by the Chinese government gives real hope that this action could be the catalyst needed to spur Chinese growth which in turn could spread throughout Asia and then out to the wider world.
Although China’s main stock index has dropped further than the 40 per cent I estimated in January their situation remains quite different from their Western economic rivals. Chinese banks are liquid, personal debt levels are low while savings levels are high and should their new fiscal stimulus package need to be entirely financed by new government debt then according to JP Morgan, their debt to GDP ratio would still be less than 35 per cent compared to 75 per cent for the US and 150 per cent for Japan.
China remains cash rich and is estimated to hold almost 2 trillion in USD foreign exchange reserves and over 6 trillion USD in deposits and when compared to the $43 billion the Chinese spent on Olympic related projects over the last few years this allocation of $586 billion US Dollars should be very supportive for their domestic orientated sectors such as infrastructure and consumption.
With fears that their important foreign export markets could contract the apparent need for such a large stimulus package is aimed at keeping their annual growth figures between the 8 per cent and 9 per cent level and with President Hu Jintao’s visit to Washington this coming weekend and a new American President-elect to co-operate with (and impress) the Chinese move is both economically and politically motivated.
Asian share indexes rose on the news of the Chinese stimulus package as did the price of oil with the commodity jumping up by over $2 per barrel based on hopes that world demand may somehow be restored. However, the commodity most analysts are watching at the moment is gold. According to Reuters an ounce of gold last Friday bought 12 barrels of oil, its strongest performance since January 2007. When oil peaked at nearly $150 per barrel in July the gold-to-oil ratio was 6.6.
Although China’s dragon economy remains volatile their latest effort could breathe fire into what is essentially a frozen global economy.
Mark Lamb is Director of FPC Investment Consultants who are Independent Financial Advisers and regulated by the MFSA to provide investment services under the investment services act 1994. For further details please contact Mark Lamb, by email on [email protected] by phone on 21318008 or through FPC’s website www.fpcmalta.com
This article does not intend to give investment advice and its contents should not be construed as such. Information in this article has been obtained from various public sources and is given by way of information only. Readers are always encouraged to seek independent financial advice before making any investment decision.
