The Myth of China - the Lure of Stimulus

Yesterday supposedly the U.S. start market bounced on the news the China economy was getting a stimulus.

But is it a hollow hurrah?

Buried in the WSJ is a blurb mentioning investors fears of insolvencies in China and how due to Chinese bankruptcy laws, they will not be able to recover a thin dime.

Here is what Roubini had to say on the Chinese stimulus:

Chinese fiscal stimulus will also provide much less bang for the headline buck ($480 billion). For one thing, you have an economy radically dependent on trade: a trade surplus of 12% of GDP, exports above 40% of GDP, and most investment (that is almost 50% of GDP) going to the production of more capacity/machinery to produce more exportable goods. The rest of investment is in residential construction (now falling sharply following the bursting of the Chinese housing bubble) and infrastructure investment (the only component of investment that is rising).

Roubini goes further describing the dramatic drop in global trade, with other Asian nations experiencing 40% drops, but notes China's exports have not dropped.....yet. What has happened with China is a the dramatic slide in imports, which are the raw materials China uses in it's manufacturing base.

Jim Rogers immediately responded to the rally China cannot pull the world out of a hole.

So one must wonder where China is getting this 8% growth with their Stimulus now being reported?

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Biology class

This kind of reminds me of biology class in high school. When the blood supply to leaches gets cut off, the leaches start to die. As an economy that is dependent on another economy, China will have a hard time making their own 'blood'. They depend on the success of other countries to stay alive. As a communist country, they can still nationalize whatever they want and quash and dissent. Will they nationalize factories? Whole industries? Or will they let their people continue to protest and stay unemployed?

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China

China uses foreign engineering services (German, American, etc.) for many of its huge infratstructural projects... buildings, airports, tramways, etc., albeit Chinese labor is used in all cases. They do cater to the world, to be sure. But they do have huge population shifts occurring and they tend to plan 50-75 years ahead.

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That was pretty easy to predict

The stock market has given up all of yesterday's gains and more today, breaking to new 12-year lows.

Even more importantly, Citicorp has "broken the buck" today. As in, their stocks are below a dollar.

Citigroup fell to $1.03 at 12:32 p.m. on the New York Stock Exchange after reaching 97 cents earlier today, marking an 85 percent decline this year and giving the New York-based company a market value of $5.5 billion. At its peak in late 2006, Citigroup stock was worth $55.70, for a market value of $277.2 billion.

At this rate Citi will be hard-pressed to make it to the Financial Friday Failure so the government can nationalize them. Investors have given up on them. Their capital is now too thin to cover their liabilities.
And this was the largest bank in the world we are talking about. What sort of derivatives meltdown will Citi's failure trigger?

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i just posted an Instapopulist on Citigroup

I'm going to make this a poll question (It's Friday at 5pm, do you know which bank failed today?)

Right, they are pouring money into these Zombie institutions, Citigroup, AIG, BoA being the biggest and after all of that....we're probably looking at the same results before burning through all of that cash.

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