Perspective on China

Many economists predict that China will not be able to escape the contagion. It is significant that they all come from the US or Europe and are projecting their own despondency into their forecasts. It is difficult to be optimistic when the world as you know it is collapsing around you and your own job may not be there tomorrow.

China is the fastest growing of the so-called BRIC (Brazil, Russia, India and China) countries. All four countries have massive land masses and that is where the similarities end. Brazil, Russia and China have natural resources, and India and China are the two most populous countries in the world. But only China has it all - land mass, large population, natural resources, and most important of infrastructure.

The interior of China still lacks investment and infrastructure but the government is addressing this weakness ith major planned investments. Many predicted that China's economy will suffer the "post Olympics blues", and to some extent the stock market seemed to bear this out as it has retreated 60% from the October 2007 peak. However, this is due more to the sentiment and cpncerns about the subprime crisis in the US.

Many countries do suffer slowdowns in their economies after hosting the Olympics because so much has been spent on the required facilites. China spent US$42 billion over the past 6 years on Olympics related projects. However, this represents only 0.5% of the RMB51 trillion spent on fixed assets investments over the same period of time. Travel up and down the coastal region and you can see the results of this investment in infrastrucutre. Over the next 2 years, China has budgeted over RMB400 billion per year (ie the equivalent of the total spending on Olympics each year) for infrastrucure developments with much of the it aimed at the interior.

Can China afford it? You bet! the Chinese foreign currency reserves have just hit US$1.906 billion as of the end of September 2008 rising from US$1.809 trillion in August 2008. China has had fiscal surpluses since the 1985, and expect the surplus this year to to be RMB600 billion (US$87 billion). It is growing at the rate of 30% in the first 8 months of 2008.

China has room to stimulate growth. While the US was gorging on easy credit, China had raised lending interest rates 8 times since April 2006, raised deposit interest rates 6 times since August 2006, and raised banks' reserve requirements 18 times since July 2006 17.5% of deposits. In September 2008, China announced limited cuts to the lending rate of 0.27% to 7.2%, deposit rate cut to 4.14%, and cut reserve requirements to 16.5% for smaller banks to encourage them to lend to SME's (small, medium enterprises). On 8 October 2008, China announced across the board cuts to reduce lending rates to 6.93%, deposit rates to 3.87%, and reserve ratios to 17%.

Over the next 12 months, we can expect to see further cuts to the interest rates and reserve ratios as China stimulates the domestic economy to make up for any shortfalls from reduced exports to US and Europe.

China will celebrate its' 60th Anniversary on 1 October 2009, and we can expect it to put on a big birthday party!