Thursday, March 19, 2009

Who are Stimulated

China and the US have one thing in common: obsession with economic growth. So their stimulus packages have turned out to be much more radical than those of EU or Japan. Yesterday The Fed of the US just announced its plan to buy more than 300 billion dollar worth of Treasury bonds, practically creating virtual money to pump more liquidity to the system. Meanwhile, China's local governments have been kicking off massive infrastructure projects one after another. Before, some of these projects cannot get bank loans because of their vague promise of benefits, but now the banks are pushed by the central government to support these projects. Even the environmental regulations that used to hinder some of these projects are being relaxed. But who do these desperate actions really stimulate?

Buyers of gold and oil in the past several months are certainly stimulated. They have speculated that the US would choose inflation over recession, and they turn out to be right. Even those who bought property might be happy that at least the interest rate will be lower. But those who believe in the green papers are again punished.

China's situation is more complicated. Besides the local governments, real-esate developers seem to be very stimulated. Many of them were on the brink of bankrupcy when at the end of 2008 their over-leveraged projects suddenly cannot find customers. At the beginning of 2009, it seemed natural that the real estate bubble in China will finally burst. But after the average price of houses dropped for about 2% in major cities, the local governments suddenly start to hand out various stimulus for people to buy houses, from tax relief to straight government subsidies. After all, the income of local governments depends on high price of land. Then, the banks started to give new loans to the developers, which saves them from selling their projects at lower prices.

Many consumers have been hoping that the developers will be forced to sell their projects low when they have to pay back development loans to the banks. Now these consumers should probably give up; as long as the developers can get their loans extended unconditionally, they can wait longer than the consumers. The sad truth is many of these consumers cannot wait that long, they might have to get an apartment to get married, or they might have to get an apartment to get residence cards in big cities like Shanghai and Beijing. More importantly, they probably cannot endure the shame of not owning a home in today's Chinese culture very long. That's how you stimulate consumer demand.

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