China Stimulus Reflects Extent of Global Turmoil (Touchpoints by Andrew Jensen)

The initial excitement around the world markets on Nov. 10 when China announced a $586 billion stimulus wore off like a sugar rush as optimism quickly turned to skepticism.

First, the stimulus indicates that even the white-hot Chinese economy is feeling the effects of the global economic slowdown, leading some to wonder if its GDP report of 9 percent growth in the third quarter was inflated and encouraging many economists to keep their projected 2009 GDP for China at between 7.5 percent and 8 percent.

The Chinese economy grew at an annual rate of 11.9 percent in the third quarter of 2007.

International observers tend to agree that the Chinese economy must sustain high-single digit GDP growth or better in order to prevent domestic unrest because of its ever-growing labor pool. Drops in demand have already forced factory closures and layoffs, and the nation’s burgeoning middle class has seen a housing bubble of its own go pop.

A second question speculated that the Chinese package was a dressed up version of government spending that was already planned and therefore was not a true stimulus or was vastly overstated.

The notoriously opaque Chinese government has responded to questions about the actual size and scope of its stimulus package by releasing a list of more than $1.5 trillion worth of domestic infrastructure projects and increased social spending.

With the Euro-zone officially in recession and the U.S. certain to join it following a fourth quarter now projected to show a contraction of as much as 5 percent, the Chinese government is focusing on domestic growth as exports slow.

Logistics numbers from China reflect sinking export numbers.

The China Business Times, citing figures supplied by the China Logistics Information Center, noted a 2.7 percent drop in transportation fees in the first three quarters year-over-year and accounted for their lowest level as a percentage of total fees in 10 years.

In tandem, deposit fees, which reflect logistics storage, were the highest on record as an indicator supply is exceeding demand.

The dry freight index, a key barometer, has declined 50 percent from its June 4 peak.

Rising fuel and labor costs are eating into profits and increasing raw materials costs are also leading to a decline in logistics investments, which are down 5.3 percent year-over-year.

In China, where logistics and transportation infrastructure are still relatively new, big foreign players are squeezing out small- and medium-sized companies. FedEx has run a loss for three years in China, but has increased its market share steadily since June.

Although the U.S. economy contracted in the third quarter, and saw its trade deficit shrink by 4.4 percent thanks to a $12 drop in the price per barrel of oil during October, its imports from China have not receded yet.

In fact, the U.S. trade deficit with China hit a record $27.8 billion in October, accounting for nearly half the total deficit of $56.5 billion.

While U.S. demand is sinking for flat panel televisions and cars from South Korea and electronics from Japan, cheap Chinese imports are still flowing.