You Can't Afford to Ignore China Again

Robert Hsu, Editor

A Renewed Focus on Economic Growth

One of the reasons why China has been able to fare the financial crisis and global economic slowdown better than other countries is because Chinese policymakers were quick to take action and focus on what truly matters–economic growth. In 2008, the Chinese central bank slashed interest rates immediately following the collapse of Lehman Brothers, and then continued its monetary easing policy throughout 2009.

Then, China's government took even more aggressive steps to weather the financial crisis with an economic stimulus package. This package is one of the biggest in China's history, with a price tag of $586 billion.

That's much larger than the U.S.'s $168 billion stimulus package and Japan's $51.5 billion relief package.

In addition to the price tag, there are other things that set China's stimulus package apart from others. Mainly, it focuses on boosting domestic investments and generating jobs, which has supported the country's economy this year. Just look at what the package will be used for:

15% of the package will fund the construction of railways this year, which will create six million new jobs and generate 1.5% GDP growth.
50% of the plan will go towards building new highways, which will create 39 million jobs in the next two years.
Boosting healthcare expenditures, especially in poor rural regions.
Building more affordable and low-rent housing.
Improving environmental protection and enhancing construction of sewage and water treatment facilities.
Developing educational systems in rural China.

In addition to this, Hong Kong implemented its own rescue plan in February. To combat the global economic crisis, Hong Kong is improving its economy with funding for public works construction, bank guarantees, tax cuts and government-backed small business lending. One of the biggest aspects of the plan includes $30 billion towards infrastructure improvement. Some of the projects being proposed include a $12 billion highway that will connect Hong Kong to gambling capital Macau and the city of Zhuhai on the Pearl River Delta.

The city is also removing taxes from alcoholic beverages, hotels, restaurants, and other tourism-related services to further stimulate Hong Kong's economy. Hong Kong is Asia's premier financial center and is a nexus point between China and the West, so the city's efforts to improve its economy help China as a whole, as well.

These economic stimulus packages are strengthening China's domestic consumption and investments, which are the two driving forces of China's economic growth right now. China's domestic investment and consumption already contribute to 80% of the country's GDP growth. And I expect domestic consumption and investment to continue to be the driving forces of the Chinese economy this year.

That's because a big part of China's stimulus plan is its investment in domestic infrastructure with some $200 billion dedicated to new spending in low-rent housing, infrastructure in rural areas, roads, railways and airports. And China's domestic consumption will likely continue to grow in 2009, as well–with the help of young, affluent Chinese that I call the Chuppies. Over the past three years, the Chuppies are finally becoming a mass consumer class, and I think this demographic group will keep China's economic growth engine humming for years to come.

Now, I know you're probably wondering how Chinese domestic demand is going to remain robust in this slow economic environment. What you need to remember is that the Chinese consumer class is still spending money. China has a savings rate above 40%, which means Chinese still have the funds to spend–they're just going to re-prioritize their spending and focus it on more necessities such as health care and kids' education.

What is the best way to take advantage of the Chinese government's renewed focus on economic growth and the strength of the Chinese consumer? Join China Strategy today, and I'll point you on the path to profits.

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