The only hope the Canadian stock market has to avoid a sustained bear market is if China regains its economic momentum. This is purely my opinion and is something I’ve written about countless times in recent months:

In plain Engrish, the main reason Canada needs China is because of what Canada does: we sell rocks and trees. Canada is a pimple on the ass of the global commodity bubble. And the biggest buyers of global commodities have been China — and to a lesser extent India — who have been doing 2/3 of the buying.

That’s why I often focus on China on this blog. So what’s happened?

Today, China announced a massive fiscal stimulus plan to spur expansion. Key points:

  • The funds, $4tn yuan, equivalent to almost a fifth of China’s $3.3 tn gross domestic product last year, will be used by the end of 2010.
  • $100 bn yuan is earmarked for this quarter, will go toward low-rent housing, infrastructure in rural areas, as well as roads, railways and airport.
  • Few details otherwise were given.

An article in the WSJ questioned how much of this stimulus plan represents new money and how quickly it could benefit the economy.

I’m not sure either how much of this is recurrent spending, but these seem big numbers. If only $100bn yuan is actually coming into play this quarter though, there won’t be a benefit till the new year.

This bears close watching. China’s insulated stock market has yet to benefit from the bounce in global markets over the last couple of weeks. The Shanghai Composite index is still down 70% from its peak one year ago.

__________

UPDATE: If the market performance in the US yesterday and Asia on Tuesday isn’t evidence enough, most market observers seem to feel the stimulus plan is nothing more than semantics. Click below for details:

Michael Pettis

The Big Picture