China also lowered its deposit rate by the same amount and reduced the proportion of deposits lenders have to hold as reserves by 0.5 percentage points to 15.5%, Bloomberg reported. All rate cuts will take effect Tuesday.

China’s slow burn of its interest rates is a calculated response to falling numbers across its board: gross domestic product could fall as low as 5% next year, way down from the 11.7% growth in 2007; exports fell for the first time in seven years last month; imports and manufacturing numbers also fell.

Unemployment figures are getting ugly, too. So far, the global financial crisis has taken 4 million city jobs from migrant workers and pushed urban unemployment up to 9.4%, the Chinese Academy of Social Sciences estimated last week. The result is rising gang violence and increased police measures and surveillances in cities hardest hit, Reuters reported.

China is also facing a dangerous decline in inflation, which limped at 2.4% annual pace in November, its fourth consecutive month-to-month drop and a sharp drop from the 4.0% posted in October, its National Statistics Bureau reported two weeks ago.

“The surprise is how small the move is,” Mark Williams, an economist with Capital Economics in London, told Bloomberg. “There’s been a sudden very rapid deterioration in all China’s economic data over the last 8 to 12 weeks.”

Last month, China cut interest rates by 1.08 percentage points, its biggest reduction in 11 years.

Also last month, China announced a massive $586 billion economic stimulus plan that will pump money into low-income housing, water and energy projects, airports, disaster relief and new railroads for the next two years.

“China understands that it’s gaining importance in the world economy and that it’s going to participate in that process,” said Keith Fitz-Gerald, Money Morning’s investment director and a former professional trade advisor who’s spent more than two decades focusing on investment opportunities in China, Japan and the rest of the Asia region.

“Many experts will see this as just a ‘bailout’ that’s directed at Chinese infrastructure projects, Chinese technology companies and at holding the global financial crisis at bay,” Fitz-Gerald said. “But the real message here is that Beijing is going to pull out all the stops to ensure that its economy does not falter. And that’s because China realizes that it’s become the super glue that’s holding the rest of the planet together.”

Source:Bank of China Tries to Spur Economy with Fifth Rate Cut in Three Months

China’s consumer price index for November climbed 2.4% for the year, a sharp drop from the 4.0% posted in October and the fourth consecutive month-to-month drop, its National Statistics Bureau said today (Thursday).

Though not ideal for China’s overall economic growth, the silver lining is that falling consumer prices open a window to take a hatchet to the 5.58% benchmark interest rate, which would pump billions back into the economy and encourage banks to boost lending.

“A worst-case scenario for deflation would see producers cutting prices, suffering lower margins and slashing wages, which would eventually damp consumption,” Li Wei, an economist at Standard Chartered Bank Plc in Shanghai, told Bloomberg.

Clothing prices fell 1.7%, and transportation and communication prices fell 0.7% (lead by a 14.3% drop in fuel).

Food prices increased the most of all things measured, rising 5.9%, lead by higher prices for grain, fish and produce. That’s an encouraging sign, as food prices are a large part of China’s inflation dynamics.

China Quick to Act

What’s perhaps most striking about China’s slowing inflation is that it’s 180-degree turn from earlier this year, when consumer prices were rising as fast as 8.7% and officials were doggedly trying to temper one of the sharpest commodity run-ups in history.

Now, domestic demand has cooled – though not nearly as drastic as other major economies – and Chinese officials are pulling out all stops to prevent prices from trending into deflationary conditions.

Its most recent push: An ambitious economic stimulus that will pour $585 billion into housing, water-and-energy projects, airports, disaster relief and railroad construction over the next two years.

Other recent examples include its litany of Olympics investments, such as stadiums and arenas, hotels, restaurants, roads, and tourist attractions that also serve as new income streams.

This focus on developing jobs and infrastructure, or “new material product” – absent in any similarly focused U.S. stimulus so far – should keep China’s economy on the fast track, while also helping boost the Red Dragon’s ailing stock market.

Stocks have responded very well since the stimulus was announced Nov. 10, with the Shanghai index up nearly 19%.

Source: China Inflation Hits 22-Month Low, Slows to 2.4%

It’s this focus on developing jobs and infrastructure, or “new material product” – absent in any similarly focused U.S. stimulus so far – that will keep China’s economy on the fast track economically, while also helping boost the Red Dragon’s ailing stock market.

China’s governmental policies famously (or infamously) favor specific state-sponsored companies – especially the infrastructure companies Beijing deems integral to the nation’s physical renaissance. And a large portion of the stimulus money is expected to go right into the coffers of these companies.

Stocks have responded accordingly, advancing an additional 11% last week. The Shanghai index extended those gains yesterday (Monday), climbing 3.6%, or 72.11 points, to close at 2090.77, as investors held out hope that additional stimulus plans would be unveiled following another high-level government meeting in China this week, The Associated Press reported.

Further fueling investor ardor was Beijing’s declaration that it would not be investing in troubled Western financial firms any time in the near future.

China’s $200 billion sovereign wealth fund, China Investment Corp. (CIC), has lost roughly $6 billion of the $8 billion invested in Morgan Stanley (MS) and The Blackstone Group LP (BX) last year. Lou Jiwei, the company’s chairman, last week rejected the notion of putting any more of the government’s money into banks outside of its homeland. And he did so citing an overwhelming fear.

“I don’t dare to invest in financial institutions now,” Lou said last week at a conference in Hong Kong, Bloomberg News reported. “The policies of the developed nations on these institutions are not clear. Until they are clear, I don’t dare to invest in them. What if they go bust? I will lose everything.”

China has a long history of doing things on its own terms, says Keith Fitz-Gerald, Money Morning’s investment director and editor of The New China Trader. But before you label China’s back-patting and trash talk as propaganda, step back and consider which of the two you’d rather invest in: A disheveled U.S. market, or infrastructure development in China, the fastest-growing economy on the planet?

Investors have chosen the latter.

“In such uproar, it’s not clear how much is bottom fishing versus bottom building,” Fitz-Gerald said of the Shanghai index’s recent run up. “However, the fact that many Chinese companies have superb numbers is undeniable.”

Following China’s State Investment Cycle

Unlike in the United States, and many other Western economies, consumerism isn’t the main engine of China’s economy.

Rather, it’s the government – a running tally Fitz-Gerald has labeled as “China’s state investment cycle.”

About 70% of China’s economy is driven by state investments, with consumers filling in the other 30%. For the United States, those ratios are reversed, Fitz-Gerald says.

The recent $585 billion stimulus plan is just one of several gigantic investments the Chinese government has made (See chart: New Material Product). Other recent examples include its litany of Olympics investments, such as stadiums and arenas, hotels, restaurants, roads, tourist attractions and more.

There are three things to consider here.

First, China is in the midst of one of its largest state investment cycles ever – generating streams of profit never before seen.

Second, when China spends big money, it feeds the companies big enough and capable enough to handle the job. It will be those companies on Beijing’s short list that rise to the surface in the next few months, Fitz-Gerald said.

And third, despite consumers driving only 30% of its economy, China has the largest middle class in the world at 300 million people. What’s staggering about this is that they are only starting to spend their growing wealth. So when these state investments give consumers more income to spend, the only problem the government will have is keeping economic growth from getting out of control.

‘Aimed at Growth …Adding to GDP’

But before getting too far ahead of the current reality here, let’s return to the Shanghai index’s rally. Much of it has been driven by clear signals that state investments will continue.

As of now, the index is nearly 67% off its October 2007 high. And that proves two things:

• First, China’s biggest companies have been severely affected by the global economic crisis.
• And second, they remain some of the cheapest stocks in the world.

The bottom line is this: The U.S. economy – as measured by gross domestic product (GDP) – will decline by 5.0% in the current quarter, followed by declines of 3.0% in the first quarter of 2009 and 1.0% in the second quarter, Goldman Sachs Group Inc. (GS) predicts.

On the other hand, analysts predict China’s GDP will grow anywhere from 5.0% to 10.0%, easily making it the world’s fastest-growing economy, no matter where it lands in that range.

Fitz-Gerald believes the direction of China’s GDP is evident in the direction its government thinks, at least economically. And if there’s one thing that pares down each country’s economic thinking, it’s a look at each their recent economic stimulus packages.

“The U.S. government is running around rewarding bad behavior,” Fitz-Gerald said. “China’s package is aimed at growth, creating jobs and adding to its GDP.”

Source: China Stocks Advancing as Beijing Boosts Investments

Still mindful of losing about $6 billion of the $8 billion CIC invested in Morgan Stanley (MS) and Blackstone last year, chairman Lou Jiwei not only bluntly rejected the notion of putting the government’s money into banks outside of its homeland, but did so citing an overwhelming fear.

“I don’t dare to invest in financial institutions now,” Lou, said today (Wednesday) at a conference in Hong Kong, Bloomberg reported. “The policies of the developed nations on these institutions are not clear. Until they are clear, I don’t dare to invest in them. What if they go bust? I will lose everything.”

The timing of Lou’s remarks has to be intentional, as government officials are about to enter its fifth round of continuing economic-focused dialogue with U.S. Treasury Secretary Henry Paulson. And he wasn’t the only high-profile person in China who trashed the health of the U.S. economy, which officially entered a recession earlier this week.

“American consumption, to be quite blunt about it, is toast, and when the consumption bubble goes that’s a big problem for this region,” Stephen Roach, chairman of Morgan Stanley Asia Ltd., said at the same conference. “There is no country in this region that is not either slowing or in recession right now because the world’s biggest end market for its exports is in serious trouble.”

One can’t help think Roach is overlooking the facts that Morgan Stanley was one of CIC’s biggest losing investments, and that China followed the United States’ lead last month in announcing a $582 billion economic stimulus.

That stimulus money will largely go to infrastructure projects – low-income housing, water and energy projects, airports, disaster relief and new railroads. [Editor's note: Money Morning recently identified five way investors can profit from China's stimulus.]

Ironically, those projects will be the focus of the United States’ next stimulus plan when President-elect Barack Obama takes office in January.

With little exposure to the mortgage-backed assets responsible for the meltdown of the world’s financial system, and billions being poured into infrastructure, China could come out significantly ahead of the West when the global economy finally rebounds.

But even with  $1.6 trillion in foreign currency reserves, China still lacks the firepower to bail out the rest of the world.

“China can’t save the world,” Lou told Xinhu. “It can only save itself.”

Source: China Slams Western Financial Firms