May 25, 2015 by ...
China announced the world’s biggest stimulus package. The amount of this deal is even larger than the 2008 debacle which lead to overspending and gross inefficiency in resource allocation. Corruption cash also predominated as dirty companies leveraged communist party contacts in order to make a buck.
The benefit to companies such as Xiaomi are more favorable interest rates. Even though they are not a State Owned Enterprise (SOE), Xiaomi’s CEO is a member of the communist legislature. This allows him to access his deep bench of buddies and get cash when he wants it.
China’s economy is in the tank. Sure it’s growing at a 6-7% clip, but then again, it must. Back in Mao’s day, per capita GDP was literally $40 per year or $3.3 per month. Those people had nothing.
This extreme poverty led to a desire defecit, or boatloads of pent up demand. With 400 million Chinese alive who grew up in those dark times, modernity is incredible. Their average income has increased 150 times to $6000 per year or $500 per month. Imagine how affluent they feel.
Consider what your life would’ve like if all of the sudden you had 150 times more to spend each month. You would literally go from $2000 to $300,000 per month.
While this sounds great, it puts pressure on the communists to perform. Each generation wants more than the last. Unfortunately it is much easier to bring in foreign dollars and grow your economy from billions to one trillion, but much harder to move from there.
WTO entry made China middle income
After joining the WTO in late 2001 for example, the Chinese economy jumped from $1.4 trillion to over $8 trillion. Increases like that are hard to maintain but what Chinese now expect.
Hosting the Olympics gave them a fiscal shot in the arm, as did the 2009 stimulus plan. Once again it generated more money, but raised expectations as well. If the Chinese don’t feel that Beijing is performing, then they may get upset and protest. In a country with an illegitimate government that’s not good. In situations like that, the people tend to revolt.
New stimulus hiding old pain
The 2008-9 plan was investment based. Beijing began to build things such as infrastructure, even if the utility of those projects was questionable. Everything from airports to apartments sprung up across the nation.
Like I said, the funds were squandered and considered a waste. The new plan will build upon that fiscal malfeasance but waste much more.
The Chinese Politburo announced , “The top choice for stabilizing the economy will be boosting investment.”
The last time Beijing displayed such financial irresponsiblity, they outspent the U.S. by 400%. In five years they created credit equal to that of the U.S. This would not be bad if the loans created were solvent, but they are not. In fact, China’s bad debts are alarming. Speaking of alarming, the banks have been told to keep loaning to SOE’s even if they cannot payoff old debt.
As stated, Xiaomi’s not an SOE, but might as well be. Leo Jun is ‘communist party’ed’ up so all his buddies have access to cash. They will spread it around to their clansmen, of which , Lei Jun is a member.
Watch as the new push for communist-backed cash leads to heartier accounts at Xiaomi.