While China made headlines with a historic interest rate cut this week, the World Bank weighed in with a gloomy prediction about China that received scant coverage. For emerging-market investors who missed the story, the World Bank’s assessment of China’s economic performance in 2009 could reshape their strategy for portfolio allocation.
That said, China’s economy is still on track to post impressive growth during a global financial crisis. Unfortunately, this growth won’t meet initial forecasts.
In its latest quarterly report, the World Bank revised China’s growth downward to 7.5% from an earlier projection of 9.2%. The change reflects the World Bank’s view that Beijing isn’t doing enough to shift the country’s reliance away from waning exports to more robust domestic growth.
The Chinese economy grew by 11.9% 2007, in what appears to be the peak in double-digit expansion since 2002. Now facing single-digit prospects in 2009, China’s slower-than-expected advance call into question the global economy overall.
While most pundits see diminished U.S. consumer spending impacting China’s exports, emerging markets worldwide contributed significantly to the export boom of the past few years.
Latin America, Eastern Europe, Russia, Southeast Asia and other regions able to cash in on skyrocketing prices of fossil fuels, metals and grains are themselves suffering from the market turmoil. As commodity prices plummet, the expanding middle classes of these emerging nations begin to contract - reducing spending on consumer goods coming into their countries from China.
Reading between the lines, the World Bank also seems to be saying that the worldwide recession will be here for years to come - further hampering China’s ability to stimulate its economy.
The World Bank’s report also challenges the effectiveness of China’s new $586 billion stimulus package announced earlier this month. The package called for a massive national infrastructure build-out. Given the World Bank’s view of China’s over-reliance on exports, the new stimulus plan could ultimately prove to be a “bridge to nowhere” with no substantial growth for the long-term returns that emerging markets count on for these massive projects.
Obviously, the much ballyhooed stimulus plan isn’t enough to carry the day in China.
The latest rate cut, to 5.58% for loans and 2.52% for deposits, was the fourth cut since September.
Now, potentially like the U.S., China’s lower growth rate next year would rely heavily on higher public spending, according to the World Bank report. This could be a harbinger of how the incoming Obama administration would attempt to fix the U.S. economy based on recent news stories.
Taking into account China’s stimulus plan and other domestic projects, Beijing’s spending would add 4 percentage points in 2009 to the economy compared with 1.5 percentage points in 2007.
Another drain on China’s coffers could be subsidies for the increasing ranks of unemployed factory workers. Shrinking exports mean lower demand for products.
The government has announced new measures to support the economy, out of fear that the crisis and growing unemployment could cause increased public protests, according to AsiaNews.
Facing an epidemic of protests, Public Safety minister Meng Jianzhu warned that local regulators could face “social problems affecting stability.” In particular, there is the danger that the slowdown in exports will cause widespread unemployment.
Gunagzhou province provides a snapshot of where unemployment is heading.
A recent Chinese media report cited data from the Guangzhou Train Station, which showed in early October that the number of departing passengers compared to the same period last year had increased by 128,000.
Guangzhou is one of China’s largest manufacturing export centers.
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