The American economy will start to pick up in the middle of 2010

China will continue to grow but will rely more and more on internal demand
which will also be good for America and for the global economy as a whole.

Mark my words.

The 7.9 percent growth rate that China announced for its first half year performance may have made a lot of people feel better, however, a recovery requires rather more substance than hype. We would do well to note that such growth comes at a huge cost coming from China’s economic stimulus plan injected into the economy at the beginning of the year. Were it not for this, I would suspect that China’s real growth during the period would be far lower at about 3 to 3.5 percent.

China can only pull off the economic stimulus factor once, and I cannot see where such a huge impetus is going to come from to be able to continue such figures into 2010. The government, in trumpeting the GDP figures so loudly, have effectively made a rod for their own backs.

There is also the matter of the sky-rocketing Chinese stock market mentioned in Jim Lowell’s article published last August 5. This year, the Shanghai stock market is up by 80 percent. While impressive in itself, unlike Lowell, I do not believe such a performance to be healthy.

Clearly, a mature market would not react in such a fashion. So what’s going on? Back to the Chinese economic stimulus plan again and the estimated 20 percent of the US$4 trillion stimulus plan that China injected has apparently been invested into speculation instead of infrastructure projects.

In an effort to curtail this practice, the central bank has begun curtailing bank lending. It’s also altering interbank bond holdings in attempts to get its banks to be more careful when booking loans. China’s property sector too, has shown signs of a bubble developing. Again, speculative investments to make a quick buck rather than invest long-term into more necessary projects has hijacked the good intentions.

Longer term, China’s current economic model during the financial crisis has shown strong signs of stress mainly through its reliance on exports with little appearing to have been done to radically shift the Chinese economy into a consumer driven society.

The hope that the United States will recover and start buying again seems to be the reason. When this will happen is still questionable as American growth still continues to shrink and it may be awhile before it starts to ramp up spending again. China’s economy remains addicted to 40 percent of its GDP coming from its exports. Until that unhealthy reliance can be altered, China has no choice but to await an American recovery.

While the rest of Asia- notably India- look like value for money, I suspect China doesn’t have a plan to project its economy forward in 2010. Its economic model is wallowing in America’s ocean of debt and its recent growth figures look manipulated by speculation and skewed by its stimulus plan. I cannot see what will come next to boost growth. China businesses would be wise to concentrate on investing and building their domestic infrastructure for the next two years rather than expect an immediate return to healthy dividend declarations. – Chris