The most positive story of late has been the massive stimulus package China announced recently. I posted initial comments on the plan to the At These Levels blog. As I’ve mentioned here quite often, China is trying to bolster its own economy and can’t save the Western financial system and cushion it against the changes it’s going through.

It’s clear that the turn toward socialist-oriented solutions forecast here and here is now becoming reality. US authorities are in full socialization mode, where the capitalist model is being thrown out of the window. Look at the actions, not the words. The more irresponsible a company or individual has been during the past 10 years, the better its chances of being saved. Even the grotesque US automakers will be bailed out, for the nth time.

Market mechanisms were only used on the upside, with the US Federal Reserve providing the proverbial punch bowl during its “golden days” under the charismatic leadership of the Maestro. The results are well known now, and the state has to come to the rescue.

True, we’ve reached a point where very few alternatives are available, and the state hasn’t many options. But being an advocate of free markets, it’s been devastating for me to witness that free market mechanisms weren’t given a chance to adjust the exuberance of the past eight years.

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That said, every major market bottom has seen social changes taking place, and the present will prove no different. When we’re done with this crisis our economic life won’t be the same.

The importance of the China package is that the country’s leadership has finally acted in a synchronized way to make sure the economy will be cushioned on the downside.

The repeal of the credit quota system will allow banks to lend again, even though the economic slowdown will hurt some of the potential credit demand in the short term.

It is therefore good to see that loan growth ticked up last month in China to 14.6 percent to USD27 billion for the month of October.


Source: Bloomberg

The prevailing thinking these days though regarding China is that the “story is over” because the country won’t be able to withstand a global recession next year, and that its growth will collapse as exports suffer.

But China is following through on a plan that was mapped out years ago. In the short term, Chinese authorities are stepping in to support consumption and have committed to infrastructure spending as a means of keeping growth in 2009 of around 7-8 percent.

Looking out longer term, they’ve launched plans to push the country’s manufacturing up the so-called value added chain in order to contribute more to growth and create higher-paying jobs. The decision was made long ago that many small, pollutive manufacturers will be closed down.

Furthermore, the rural part of the country is now the main focus of economic development. The party leadership is working toward bringing more of the spoils of economic growth inland.

It’s surprising that there remains such widespread doubt about the ability of the Chinese to move forward with the modernization of their economy. Looking back, it’s fairly clear that the country has moved in deliberate, stable steps in the direction of economic development.

It was around 30 years ago when the country abandoned its collective agriculture scheme and began to orient its economy around wages. Special economic zones were created, and foreign companies established manufacturing operations using cheap labor provided by the Chinese. These factories produced the cheap products to which Western consumers would soon become accustomed to buying, in the process increasing their consuming power while enjoying lower inflation.

In the 1990s the Chinese made their second big decision: In a very short time many state-owned enterprises were closed, providing opportunities for entrepreneurs to flourish. In just six years 46 million people were laid off, the government stopped setting most prices in the economy and the great privatization of urban housing was also underway.

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There will be many twists and turns for the Chinese economy as well as its society, but it’s gradually becoming clear that China’s model of development has worked well. And there’s no reason it won’t work in the future. The country’s adaptability to the changing world seems extraordinary--although it helps if you’re one of the main drivers of these changes.

When it comes to investing in Asia these days the Silk Road Investor Portfolio has a clear preference for financials and telecommunication companies. We like the former because they should be the sole benefactors of falling interest rates, while offering great exposure to Asia’s long-term domestic demand investment theme. The telecoms offer exposure to strong cash flows, sustainable dividends and growth potential.