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CHINA'S ECONOMIC RETOOLING WILL TAKE TIME
Domestic consumers remain hesitant as they are called on to fill the gap left by a drop in exports.

Daniel Inman

Finance Asia, February 2, 2009

The latest set of GDP figures from China have confirmed the widely held belief that the economy is slowing, and slowing fast. In the fourth quarter of last year, the economy expanded by 6.8% year-on-year, the slowest growth since the fourth quarter of 2001, and significantly less than the 9% growth recorded in the previous quarter.

With global trade evaporating, China's economy must find less sustenance from exports, and more from domestic consumption. This is not a new idea - for years observers have pointed to China's over-dependence on exports. The effect of the current economic downturn is that the need for a change in focus has become more pressing.

The bad news is that China's consumers might not be there to fill the gap. A survey of consumer confidence in China conducted by Macquarie in December, and released mid-January, suggests that spending is expected to weaken. Confidence is important because if people are nervous, their savings will sit in bank accounts, contributing to deflation; while if they are more bullish, they are more likely to put money into stocks and shares, helping to revive the flagging economy.

The survey - which involved interviews with a total of 500 people in Beijing, Shanghai, Guangzhou, Xi'an and Chengdu - found that most people were aware of the subprime crisis in the US, and around 70% of those believed that it was detrimental to the Chinese economy.

The perceived short-term effects were less evident. When asked about how their economic situation had changed over the previous three months, twice as many said that things had become worse rather than better, but over 70% felt no change. A similar majority expected things to remain the same over the next three months, with 20% expecting things to get better and 20% expecting things to get worse.

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