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China’s manufacturing sector has experienced a drop for the first time in three years, largely because of lower export demand from both Europe and the US.

This has prompted a monetary stimulus policy in China, and–at the same time–many banks internationally are providing stimulus as well, propping-up stock markets everywhere.

The emergency move by the U.S. Federal Reserve, the European Central Bank, and the central banks of Japan, Britain, Canada and Switzerland recalled coordinated action to stabilize global markets in the 2008 financial crisis after the collapse of Lehman Brothers.

In Italy, now the focal point of the euro debt crisis, the Treasury started emergency cash tenders for banks which have been squeezed particularly hard as Rome’s borrowing costs have soared towards 8 percent, a level seen as unaffordable in the long term.

The euro and European shares surged on the central bank action, which came after euro zone finance ministers agreed to ramp up the firepower of their bailout fund but acknowledged they may have to turn to the International Monetary Fund for more help.

These actions will lower the cost of borrowing, and that will be welcome both by deficit spending governments and industry, but for long-term help, there must also be a willingness to borrow and spend.

There may be a factor here that is not being given enough attention. We are in a world where we have experienced a great deal of new investment and consumer spending on personal computers, mobile phones, and the growth of new industries spawned by those technologies. It is natural that at the tail-end of those developments we will witness less investment spending and a slow-down in consumption.

chinaascendingThe NY Times reports that Asia’s Recovery Highlight’s China’s Ascendance. This is something I predicted when US and China’s stimulus packages were introduced, and the statistics are coming out now. Though the US economy is still three times the size of China’s, it is China and the rest of Asia that is leading the world out of the global recession.

One question mark remains about China’s recovery, and that is whether Chinese consumers can make-up for the lost demand in exports to the US and Europe. One positive sign,  Chinese banks lent a record 1.1 trillion dollars in the first half of 2009. Another positive sign, US and European companies still find China a more affordable production location, and worker training has improved. As long as trade barriers do not become too popular, I think China will continue to lead the world out of recession.

Do you agree?

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