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Yesterday, April 9, 2008, Patricia Jiayi Ho from the Dow Jones Newswires published that China’s March automobile sales figures increased 21.4% over March last year. Consumer demand for automobiles has continued despite rising inflation. “Food-driven inflation has [had a] minimal impact on . . . spending decisions,” said Matthew Kong, an auto analyst for Fitch Ratings. The cost of a compact car is “not a big deal” to the middle class.

This spending pattern of the growing “China middle-class segment” and the expansion of urban infrastructure will continue to stimulate economic growth and stability for the entire world economy. The inflation problem is being dealt with by China and Hong Kong government leaders through recent decreases in both Income and Employment Taxes; also implemented were significant increases in minimum wages.

Decreased Taxes: Tuesday, February 26, news on China disclosed tax cuts in both Corporate and Personal Income Taxes and also Employment/Salary Taxes (marketwatch.com). Tsang (Hong Kong's Financial Secretary) also announced a Personal Salary Tax Rebate and a Property Tax Rebate (cnnmoney.com).

Increased Minimum Wage: Wednesday, February 27 news (marketwatch.com) on China highlights minimum wage increases across the country so that "the reality of higher food and fuel prices [is] offset with higher wages. This is more wages catching up to where the market is today." The rise in wages and lower taxes on salaries and property will help China to maintain a level of consumer calm and stability in view of high food and consumer goods prices.

Increased auto sales is only one area of significant China consumer spending. Additional spending trends are presented in an article dated April 3, 2008, by Shaun Rein of the China Market Research Group [CMR]. Mr. Rein presents findings (see “China's Rising Retail Market” on Seeking Alpha), regarding in-depth interviews with Chinese between the ages of 22 to 32. They were asked about the effect of “a global slowdown” on their shopping habits. The reply, “a resounding NO effect.”

A full 90% of interviewees said they expected to ‘spend considerably more’ in 2008 than they did in 2007, and the vast majority were “very optimistic” about salary potential in the next two years . . . expecting 10% to 25% increases in the next year...More than 70% of the young people . . . interviewed said they use search engines such as Baidu (BIDU) to find out more about products.

Other internet resources used for gaming and blogging are Netease (NTES), Shanda (SNDA), and Sina (SINA).

The hard working people of China deserve to improve their standard of living. I'm optimistic that as they participate in the world economy it will help pull everyone through the pervasive detrimental effects of the subprime problem. I feel “global economic optimism” is a factor that is sustaining the improved US stock market conditions in spite of negative domestic indicators.

Baidu is my personal favorite China stock. They are the dominant China search engine with over 60% market share in a market with over 210 million users. Recently BIDU expanded their services to include instant messaging and online radio services (including music ordering and downloading). BIDU also recently secured impressive management talent onto their team by adding Peng Ye as COO (formerly Apple’s (AAPL) China Chief) and Jennifer Li as CFO (formerly a GM (GM) executive).

Analyst price ranges for BIDU are from $300 to over $400 per share (current closing price $288.81), First Quarter earnings that will be released later this month are projected to have grown an impressive 87% compared to the 1st Quarter of 2007. Prior 4th Quarter reported earnings grew by 93% over the prior 4th Quarter. Given the growth of the Chinese economy and the Chinese internet user base, I feel BIDU (at $288.81) has more financial potential than Google (GOOG) (at $464.19).

Disclosure: The author holds long positions in BIDU and SOHU

Source: China's Improved Living Standard Contributing to Global Economic Growth