Why Investors Need to Understand China’s “Crucial Year”

About: Premier Wen Jiabao, Premier Wen, global financial crisis, China's economy, China investing, China economy, China Stock Digest, Chinese economy, China stock market

Every investor with a stake in China will be wondering what to make of Premier Wen Jiabao's declaration that this is China's "Crucial Year."  We'll be hearing that phrase a lot. We'll be seeing lots of boring essays and lengthy speculation. At the China Stock Digest we're looking for brevity and clarity, so we're going to give you the shortest possible read, in point form.

• 8 percent GDP growth is the official target. Don't believe it. That has been the target for the past five years and China has always exceeded its goal.
• 3% inflation is now the official target. Don't be surprised if China's inflation rises to four percent. The flood of lending last year has created tremendous inflationary pressure.
• A bearish indicator would be any inflation level above 4 percent. This will trigger urgent measures to clamp down on lending, putting pressure on business expansion.
• 7.5 trillion yuan is the government's target for lending, substantially less than the flood of money, 9.4 trillion yuan (or $1.4 trillion), lent by banks last year. The gusher of lending in January 2010 equaled three months of last year's lending so it will be tough for the government to meet it's target without crimping business lending

What are western investors to make of Premier Wen's core declaration: "This is a crucial year for continuing to deal with the global financial crisis, maintaining steady and rapid economic development and accelerating the transformation of the pattern of economic development." There is much coded information in this very crowded sentence:

• "dealing with the global financial crisis" means keeping a lid on the value of the yuan so that China won't be shut out of the recovery of developed nations
• "maintaining steady and rapid economic development" might seem contradictory but it means striking a balance between the fastest possible growth while holding down inflation…a very delicate balance.
• "accelerating the transformation of the pattern of economic development" means shifting the resources of the state even further towards social welfare programs, so that impoverished rural Chinese, and city dwellers without health insurance, will be inclined to spend rather than save.

Finally, Premier Wen's description of this year as a crucial year:

• This suggests that 2010 will be a turning point for China. With the rest of the world still weakened, this year will be crucial in achieving China's goal to create a pattern of sustainable prosperity and growth to be envied by the rest of the world.
• Being a crucial year, 2010 will involve some tough choices, changes and volatility. But Beijing clearly sees much better times just around the corner.