IsÂ Chinaâ€™s Economy Doomed?
Boom or Bust
Making Sense of Many Predictions about China
â€œOnce known asÂ an economic miracle, China now heads for an economic catastrophe.â€Â This recent internet posting contained terrifying words to be sure. But thisÂ isolated publication was just one of countless predictions calling for everythingÂ from boom to bust for China over the past few days. Whom should we believe?
Thereâ€™s no doubt that ChinaÂ faces big challenges as western economies slip into recession. Orders for Chinaâ€™sÂ exports are still increasing by double digits, but the rate of increase is definitely falling.
One key index, the Purchasing Mangerâ€™s Index (PMI), slumped by 68 percent from its record high last October.Â Export orders shrank by the largest degree since the surveys began, as the worldwideÂ financial crisis weakened demand for Chinaâ€™s toys, textiles and computer products. So whyÂ does Chinaâ€™sÂ economy continue to grow?
As we detail in this monthâ€™sÂ issue of the China Stock Digest, Beijing has opened the floodgatesÂ ofÂ government spending. As much as one trillion dollars worth of stimulusÂ is being injected into key sectors of the Chinese economy.
Just today Beijing uppedÂ the ante by committing another $145 billion to help poor families buy Chinese-madeÂ appliances. This new campaign is designed to absorb the excess production capacityÂ caused by the export slump and to benefit industries like steel, plastics, andÂ electronics.
This will be the key toÂ keeping the Chinese economy in expansion mode, boosting the internal economy.
The worst case scenario?Â Probably the lowest authoritative prediction for the growth of Chinaâ€™s economy
comes from the World Bank. Just a few days ago the bank cut its forecast forÂ Chinaâ€™s expansion from 9.2% to 7.5%. If only the U.S. could manage to grow halfÂ as fast.
As deeply as the World BankÂ cut its forecast, it said the country has "adequate tools" to keep the economy
moving at a healthy pace. Sure enough, one of those measures came out of theÂ toolbox this week as the value of the Chinese yuan tumbled by record percentagesÂ against the dollar. This wonâ€™t be popular in Washington, but it will make ChineseÂ exports more attractive to western buyers.
Not surprisingly, the brightestÂ projections about the future of
Â grow at a blazing-fast 10% rate next year. How is that possible?
The â€œhugeâ€ potential ofÂ domestic consumption and investment can counter the impact of a global slowdown.
While President Hu Jintao admitted that the central government faces enormousÂ challenges coping with the global financial crisis, the shift to internal economicÂ expansion is the key.
Exploiting the â€œvast developmentÂ potentialâ€ of the worldâ€™s most- populous nation is crucial, so says the powerfulÂ State Council. Beijing is now working on further steps to help struggling companiesÂ in the steel, automotive, petrochemical and textile industries. It may alsoÂ expand insurance for the jobless, a critical measure to avoid civil disturbances.
How times change! Just aÂ few months ago China was clamping down on credit and reining in price increasesÂ to prevent the economy from overheating. With amazing speed, the governmentÂ has changed from jamming on the brakes to hitting the gas with both feet.
The state pension fund hasÂ pledged to invest more in Chinaâ€™s depressed domestic stock markets. Insurance
Â companies have also been instructed to boost their stock investments. WhetherÂ or not we believe that any government should tamper with the markets, the factÂ remains that
What does all this meanÂ for investment in China? Although shares in
As we know, U.S. stock marketsÂ are continuing to gyrate wildly, and China-based ADRs are fluctuating in tandem.Â We donâ€™t foresee stabilization among U.S. markets in the near future. Thatâ€™sÂ why weâ€™re maintaining an extremely conservative policy towards China investments.
For the short term, newÂ reports of weakness in the Chinese economy may further depress shares. But the
Beijingâ€™s stimulus plans may have widespread effects during the first half ofÂ 2009. Thatâ€™s when we may see the
As long as Chinese sharesÂ are being discounted, future buying opportunities are being created.
Doomsayers who predict catastropheÂ for China are always coming out with new predictions. The evidence says theyÂ are wrong again. Challenging months are ahead but challenge can create new opportunities.
KeepÂ your eyes on your email inbox as we look for new opportunities. Our investmentÂ recommendations for this period will depend on quick buys and equally fast sales.
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CommittedÂ to your PROFITS from China,
Editor In ChiefÂ
China Stock Digest
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