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China Growth: "All Systems Go"

Portfolio Manager Romeo Dator is in Beijing this week and has sent back some interesting notes to our team.

The dominant feeling at the JP Morgan Conference is “all systems go” for China growth.

Despite its economic slowdown, China is alone among the five largest global economies in seeing growth during the first quarter of 2009 compared to the same period in 2008.

China’s stimulus plan, approved in November, has produced better-than-expected results and the economy has shown improvements not anticipated until the second half of the year. The government is also prepared to initiate additional stimulus should the economy weaken.

It’s no longer just about savings in China. The rise in auto and property sales shows Chinese consumers will spend money given the right incentives. The country’s new middle class expects to make more every year, and thus feels free to spend more.

A rebound in demand is anticipated by the end of 2009. That explains why we’ve seen stockpiles of natural resources like copper and iron ore build up this year.

One cautionary observation: the concentration of consumer activity in top-tier cities has yet to trickle down to second-tier cities. Demand for high-end real estate is significantly lower in provincial cities, where the focus remains on affordability rather than status.

The dependence of other Asian countries on China also bears watching. Recent growth seen in these countries has been driven by exports to China and not a result from internal strength in their economies.