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Answering 2008's Biggest Mystery

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Markets detest uncertainty, and the rapidly increasing scale of this U.S.-led financial crisis has created plenty of it in recent months.

At the height of the panic of 2008, increased evidence of a slowdown in China's economy smashed prior presumptions about the nation's unstoppable growth, sending shockwaves of uncertainty through the industrial, transportation, and commodity sectors. Providing a comprehensive update on the state of the Chinese economy, a recent World Bank report lays out a relatively bullish assessment of the country's outlook, even in the face of global turmoil.

China holds the key
While China's GDP growth declined sharply indeed, from 12.6% in mid-2007 to 9% for the third quarter of 2008, the World Bank expects China's economy to expand by a still-healthy 7.5% through 2009. With the latest estimates for global GDP growth in 2009 ranging between 1.5% and 3%, China clearly remains a relative hotbed of growth, and therefore a logical focal point for today's global investors.

China's announcement of a $586 billion stimulus package last month marked an abrupt reversal from prior policies in place since the fall 2007. Previously, the government sought to reign in growth and reduce inflationary pressures. Those tight monetary policies spawned a contraction in the housing sector, bringing real estate investment growth near zero.

Meanwhile, the Chinese stock market has fallen by more than 60% since October 2007. Stark warnings from steelmakers like POSCO (NYSE: PKX  ) , production cuts from Aluminum Corporation of China (NYSE: ACH  ) , and the amazing crash in freight rates for dry bulk shippers like DryShips (Nasdaq: DRYS  ) and Excel Maritime Carriers (NYSE: EXM  ) sparked widespread fear over the viability of continued growth for China.

If the latest report is any indication, though, those fears may have been overblown. Because the real estate slowdown created a sudden surplus inventory of related supplies, industrial indicators like electrical production and freight volumes slowed far faster than the overall economy. In the context of the world markets' panic at the time, I believe that data caused investors worldwide to overshoot substantially. Shares in related sectors paid the price.

Thanks to resilient demand from emerging economies, and continued gains in global market share, China actually experienced 13% year-over-year export growth in the third quarter of 2008. Under the circumstances, that number speaks volumes. Consumption appears alive and well in China, with a 17% growth in retail sales accompanying a 10%-13% increase in household income.

China's gross exports represent about 40% of its GDP, so the likelihood of reduced demand for export goods as the world's economies weaken further does represent a distinct hurdle to the country's growth outlook. Left alone, those pressures, combined with stock market losses and the real estate correction, may well have painted a bleak picture indeed. But China's response adds a flood of bright colors.

The stimulus plan is for real
Given the rampant skepticism surrounding China's announced stimulus package, perhaps the most crucial takeaway from this World Bank report is that the stimulus is very real, and it must not be ignored. First of all, spending through this program will be front-loaded, with more of the $173 billion pledged directly by the government to be spent in 2009 than in 2010. About $17.6 billion will go to work even before the end of this year, suggesting that the government is not wasting any time getting these projects under way.

While skeptics assert that many projects had been in the planning stages for some time, the World Bank stresses the importance of the stimulus in turning plans into concrete actions, providing an improved environment for securing the necessary financing. For raw material titans like BHP Billiton (NYSE: BHP  ) and Rio Tinto (NYSE: RTP  ) , and for Chinese oil supplier CNOOC (NYSE: CEO  ) , this bullish interpretation of China's stimulus package must be a sight for sore eyes.

A Sino-centric worldview
I believe the evidence is overwhelming: China will be the keystone of the global economy through the difficult times ahead, and a principal catalyst for recovery in the world's markets once we've trudged through the worst of it all. With a ballooning trade surplus expected to expand foreign reserve holdings beyond $2 trillion by year's end, and $2.5 trillion in 2009, China stands in a position of relative strength. I doubt global financial turmoil will be able to knock it off its feet.

If you believe, as I do, that China holds the key to recovery for a long list of companies around the world, then consider taking the Motley Fool Global Gains newsletter service for a test-drive for 30 days. The Global Gains team has recommended one of the companies mentioned above, and watches China carefully as it scours the globe for exciting and Foolish investment opportunities.

Further Foolishness:

CNOOC is a Motley Fool Global Gains recommendation. POSCO is a Motley Fool Income Investor selection. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Christopher Barker can't keep his hands out of China's cookie jar. He can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He owns shares of Aluminum Corporation of China, BHP-Billiton, and CNOOC. The Motley Fool has a disclosure policy.

Read/Post Comments (2) | Recommend This Article (27)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 01, 2008, at 7:39 PM, starbucks4ever wrote:

    If China will expand its reserves to 2.5 trillion in 2009, its economy is doomed. No country can survive the loss of the amount equal to its nominal GDP, and the 2.5 trillion worth of US bonds is a bad debt, much worse than a subprime loan. If you own subprime, you can at least foreclose and sell later when the market recovers. China's currency reserve is an unsecured loan to a subprime government, and the losses can easily amount to 100% of the principal.

  • Report this Comment On May 25, 2009, at 10:24 PM, 5h4rk wrote:

    i am skeptical that china can continue this gdp growth long term. they would have to be one of the most regulated and least free market economy in the world, which is never a good thing. why do people become convinced china but no one else can sustainably achieve these figures?

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