China's, Economic, Outlook, for, 2010

When it came to the world's economy, China came out smelling like a rose. By acting quickly in late 2008 to introduce a stimulus package for its own domestic economy, Beijing managed to keep its economy whirring and even showed growth at the end of 2009. In the major cities though, real estate is showing signs of becoming frothy, with Chinese Premier Wen Jiabao promising that the government will act forcefully to cool prices.

A great challenge within the Chinese government is over when to act? While the Chinese government has more economic tools available than the US government, which relies almost entirely on interest rates to guide growth, a major bone of internal discussion is over when to take action? Too early, and some continued growth may have been forsaken, too late and, well, it's too late.

Because of the government's stimulus package, much of the aid has flowed through China's state-owned banks to state-owned enterprises (SOEs). The result: the state sector has grown, while Chinese private businesses have had a hard time keeping their head above water. Outside China, all of the cash-rich companies making major energy deals are SOEs. Compared to previous years of reform, Chinese university grads now prefer to work for SOEs where they have more job security than with the private sector.

The trouble with state-owned enterprises anywhere is that while they offer good job security, they are slow to change and slow to innovate new products and services. China has shown that it is the best in the world at making commodity products at low prices; no other economy even comes close to competing. But this growth is predicated on there being a large base of consumers who have money to buy these things, either overseas (mainly in the US), or in China (as has not yet happened). In 2009, the US consumer base which fueled China's exports for the past 30 years largely disappeared because jobs and easy credit evaporated, and the large Chinese consumer base which would replace American consumers has not appeared yet.

In 2010, we will find out if this gap is manageable for China, or whether it's a bridge too far.