September 29, 2022

Chinese Stock Market Collapses 67% Despite Massive Stimulus Programs

The debate over whether or not government stimulus spending (financed by borrowing) is effective in reviving post crash economies rages on in the U.S.  Despite the anemic economic recovery, proponents of deficit spending postulate that things would have been much worse without it.  Opponents of massive deficit spending insist that the problems are merely being amplified and will result in an economic horror show as governments reach the effective limits of borrowing and taxation.

The final ending has yet to be played out in the U.S. but the collapse in the Chinese stock market since 2008 suggests that massive government spending programs do little to enhance structural reforms or the deleveraging necessary for a sustained economic recovery.   Since 2008, the Chinese stock market, as represented by the Shanghai Composite Index has dropped a staggering 66% and looks like it’s heading to new post crisis lows.

chinastocks

The Chinese economic stimulus plan of 2008-2009 was a 4 trillion RMBY (U.S.$ 586 billion)  attempt to mitigate the impact of the global financial crisis.  Putting money into the economy can certainly help create jobs and increase sales, but critics of the program noted that much of the spending was channeled into useless or unnecessary infrastructure spending in a country that already had excessive production capacity and over-investment.

The most noteworthy examples of the end result of the Chinese stimulus program were roads and bridges to nowhere, empty office towers and the South China Mall, now the largest empty shopping mall in the world.

empty-chinese-mall

The Chinese economy is now slumping again as weak markets in Europe and America reduce demand for Chinese goods and services.  Many of the loans made during the stimulus program of 2008-2009 will need to be written off, putting the Chinese banking system at risk.  Exactly how does the Chinese government propose to deal with a weakening Chinese economy?  You guessed it – another stimulus program!

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