Only in China would 20 million unemployed migrant workers coincide with economic growth.
Yet in contrast to OECD nations, China is best positioned for an economic rebound in the second half of 2009.
Aggressive policy measures to revive growth and low equity valuations
make China the odds-on bet for best performing stock market in 2009 and beyond.
China’s economy is being buffeted on two separate and unrelated fronts.
Trade has grown in importance to its economy since 2001 (exports rose from 22% to 35% of GDP).
A widely publicized export slowdown has occurred and taken several points off 2008’s high rate of economic growth.
The Financial Post reports that at the same time the domestic economy was also slowly heading into the global credit crisis.
Authorities raised borrowing costs and reserve requirements for banks to stop overheating in the property sector.
The confluence of these two events has cut economic growth in half: GDP expanded at a 6.8% year-over-year rate in the final quarter of 2008.
Which is why policymakers in China announced a US$586-billion spending package over two years, cut its overnight lending rate to 5.31% and lowered reserve requirements for banks, and are encouraging banks to increase lending to finance home ownership and infrastructure investment.
These measures are credible and better implemented in China than in for example, the United States.
The most obvious differences for China is that unlike the United States it is not heavily indebted (debt less than 20% of GDP and fiscal surplus in 2008); it has significant excess savings (savings rate equal to roughly 50% of GDP); and its banks are mostly well-capitalized, thus able, and also willing, to lend (China’s five largest banks have a tier one capital ratio in excess of 9%).
It is highly probable that authorities will reach target growth of 8% of GDP in 2009.
Authorities realize that they need to rebalance growth away from exports toward domestic demand, especially domestic consumption. Savings rates are high in China because social security is inadequate.
Last week, the government announced plans for universal health-care coverage by 2011, according to Arthur Kroeber of Dragonomics Advisory Service, as well as a second stimulus package designed to boost pensions and minimum-income support. However, these are long-term goals.
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