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China Business

Mar 6, 2009

Power in Beijing balance sheet
By Peter Navarro

China is under tremendous economic and political pressure to implement a well-targeted fiscal stimulus to jumpstart its flagging economy. The good news for China is that if countries were companies, China would have one of the best balance sheets in the world.

China's strong balance sheet gives it the power to engage in large fiscal stimulus without worry of "crowding out" private investment. This is because, unlike the US, China will not have to resort to heavy deficit financing that would otherwise drive up interest rates and make it hard for the private sector to borrow.

China's strong balance sheet will also allow it to engage in

Warren Buffett-like "buy low" behavior to acquire under-priced assets and companies around the world. While China's fiscal stimulus will help drive recovery in the global economy, the "buy low" portion of China's strategy will result in a world where ownership has significantly changed once recovery comes. To put it most starkly, China will emerge from this crisis owning large new chunks Americana and the resources of Africa, Russia and beyond.

The key to China's fiscal stimulus success lies in the country's ability to grow its domestic consumption sector. Chinese consumption is only one-third of its gross domestic product compared with two-thirds for the US. Much of China's growth is export-driven - and it can no longer rely on this to the same extent as before the financial crisis.

The key to building up Chinese domestic demand is a fiscal stimulus geared not just towards building new infrastructure but also towards reinstating viable healthcare and pension systems that were lost in the country's privatization drive. Chinese consumers can't be viable as a group unless they have some security in these two areas. Otherwise, they will over-save and under-consume.

China's economy can't pull the world economy out of the doldrums alone. But an expanding China will lift Asian neighbors like Japan, Singapore, South Korea, and Taiwan off the deck. A growing China will also help the commodity nations - from Australia to Brazil and the Middle East.

From an investor point of view, the Chinese stock market is clearly outperforming other exchanges. However, risk still remains to the down side. Investors who want to "play" China can invest in China's equivalent of the American Dow Jones Industrial Average. This is the exchange-traded fund FXI. Be cautious here, however, because like most stocks worldwide, FXI still looks more like a sell than a buy.

Peter Navarro is business professor at the University of California-Irvine, a CNBC contributor, and author of The Coming China Wars. www.peternavarro.com

(Copyright 2009 Peter Navarro.)

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