China's Economy: Some Reason for Hope

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In the second half of 2009, they write, demand will start to pick up as construction projects under the stimulus plan get under way.

Glimpse of Real Estate Recovery?

That's not to say that China's recovery faces no obstacles. Indeed, the massive increase in bankruptcies and nonperforming loans will place a huge strain on the financial system. Although China has cut interest rates four times (BusinessWeek.com, 11/26/08) since September, money is still tight as banks favor large, state-backed companies instead of cash-strapped small and midsize enterprises that are perceived as greater credit risks. "We need to get prepared for a slew of extremely weak data in the coming months," write Lu and Bond.

Things could still unravel if the property market fails to recover. Property accounts for 25% of all fixed-asset investment, and is a principal form of wealth holding for Chinese consumers who have few alternatives apart from the stock market, which has cratered more than 60% in the past 12 months. "The property market is the crux of overall consumer demand," says Ulrich, who points out that construction accounts for 50% of China's steel demand, so a slump at home will mean lackluster prices globally, too.

There are, however, tentative signs of recovery in the housing market. In Shanghai volume sales jumped 47% in November from the previous month, while in Chongqing, another bellwether market, sales are also starting to recover. To be sure, prices could still soften further, but getting cash in the door now is essential to keeping more property developers from going under.

China punches well above its weight as a source of global economic growth. Although the country accounts for just 6% of global GDP, it is expected to account for about 60% of global growth next year. Luckily for the rest of the world, China is unlikely to abandon its long-term path of a strengthening currency. Ulrich points out that the 1% depreciation of the yuan against the dollar (BusinessWeek.com, 12/5/08) in the past month does not suggest Beijing has rethought its currency strategy. "The export sector faces huge challenges, but don't expect a devaluation that would trigger competitive devaluations across the region," says Ulrich. "As the economy recovers, the [yuan] should resume a steady path of appreciation."

With Bruce Einhorn in Hong Kong.
Balfour is BusinessWeek's Asia Correspondent in Hong Kong.

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Balfour is Asia Correspondent for BusinessWeek based in Hong Kong.