China's Metal Stimulus Package

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Several weeks ago my colleague Amy reported that the provincial government in Yunnan province would begin buying up metals to help save the local economy. This week, Reuters reported that the local government would purchase these metals using bank loans secured against smelters’ metals stocks. And that is the odd part of the story. If the Chinese government intended to stimulate the market (not a bad idea in a down market) one would think that the funding would at least be made by the government or through a tax incentive or a rebate of some sort.

But according to the article, “the provincial government expects local metal smelters to get loans from banks to fund the purchases, and it will subsidize interest paid by smelters. The stocking up of reserves will be done between December 2008 and the end of 2009.” Even with the interest subsidy, it’s hard to understand how this scheme could possibly work on a long term basis. The smelters will continue producing the metals will be purchased and financed using loans in a declining market. The smelters, or province, will hold the declining asset in reserves to be used on some future proverbial rainy day, when presumably demand will again outstrip supply. Meanwhile, smelters, instead of shuddering production, will continue to produce (and be more in debt at the same time).

What is more disconcerting (and very likely to happen) is for China to re-evaluate its export tax and VAT rebate schemes. Only this time, the schemes will work in the opposite direction making Chinese goods even cheaper, in the hopes of improved export sales and economic stimulus at the expense of curbing pollution. Though this won’t affect any WTO rules per se, it will likely result in a flood of cheap imports which will subsequently result in more anti-dumping cases. The anti-dumping cases will effectively shut off Chinese imports (of most likely, aluminum) which ought to in turn, force the Chinese mills to further limit production. What did Albert Einstein once say about insanity? Insanity is, “doing the same thing over and over again and expecting different results.”

Right.

–Lisa Reisman

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