Huge gains in Chinese equities markets may make huge risks

Douglas McIntyreDouglas McIntyre RSS Feed
Jul 3rd 2009 at 1:00PM
Text SizeAAA

Filed under: Economy

More

The Shanghai Composite, the major stock index in China, is up 68 percent this year. The Dow Jones Industrial Average is off 5 percent.

China's economy may still be expanding at a 7 percent rate, but the risks to the growth are considerable. China is relying on a $585 billion stimulus package to prime the pump of consumer spending. The money is also going toward mammoth infrastructure projects. At some point, all of the investment capital runs out.

China is still faced with some real problems. Export demand is way down. With the economies in Japan, the U.S., U.K., and E.U. slow to recover from the recession, that is not likely to change soon. China cannot beat the world economic markets forever. The rest of the world has to start increasing demand for the country's goods.

Big stimulus packages often mean big inflation. A number of economists believe that the money that the Chinese central government is dumping into the system is causing speculation in real estate and stocks. As prices continue to move up sharply, China will have to deal with a bubble in business and residential properties and an equities market that is still rising sharply without concrete economic support.

Unemployment is, by most observations, still high in China, especially in the huge cities that the government has built in the interior of the country to house factories and tap cheap rural labor. After the stimulus money is gone, fast rising GDP and high unemployment never go together. GDP growth will have to give way.

Douglas A. McIntyre is an editor at 24/7 Wall St.