Storm brews in the East

Riots, economic collapse and the end of the Communist Party have all been predicted for 2009, but China is not on the ropes yet.

"Buckle up for what's coming," says Goldman Sachs, for there's a storm brewing in the East. And the erstwhile investment bank is not alone in its gloom. Everyone from Hu Jintao, the Chinese president, to the traders on Shanghai's stock exchange has suddenly decided that the world's third-largest economy is set for a tumultuous 2009.

The apparent turnaround in China's fortunes has been abrupt. In October, Chinese exports rose by 17.6 per cent compared with the year before, inflation was cooling, a £400 billion (Dh2.16 trillion) "New Deal" stimulus package had been announced and all was well.

One month later, however, after exports shrank for the first time in seven years, panic broke out. One after another, economists have cut their growth estimates. The current king of the bears is Royal Bank of Scotland, predicting just five per cent growth - one percentage point less than Goldman Sachs. The country's manufacturing base shrank in November, figures released this month showed. The Chinese government has also been notably unsettled. President Hu and Wen Jiabao, the prime minister, have both admitted that the financial crisis has had a "much deeper" effect on China than anticipated. Zhang Jing, the mandarin in charge of day-to-day economic and reform policy, said China had been derailed.

The economic crisis, he said, posed a "serious challenge" and made it "difficult" for China to attain its targeted growth. Government think-tanks have secretly predicted that growth could be as low as four per cent - a catastrophe in a country that needs to create millions of new jobs. The Communist Party has pledged to create nine million jobs in China's cities next year. But many are questioning its optimism, and some experts predict that 25 million people could be unemployed by the year's end.

"The fact that the government is talking about social tension is an important signal," said Ben Simpendorfer, RBS's chief Asia economist. "The public security bureau is questioning fired workers to find out what they are up to." Riots have already broken out across the export-led manufacturing belts in southern and eastern China. Factories are closing without paying workers, and local governments have been paying compensation to avoid any serious social tension. "So far, I don't think we are talking about systemic breakdown," said Simpendorfer. "There's more likely to be sporadic patches of unrest."

However, in a country the size of Europe, not all news is bad news. The factories in the Pearl and Yangtze river deltas may be closing, but in central and western China there is plenty of optimism for the year ahead. In Pudong, the skyscraper district of Shanghai, the office workers are calm and phlegmatic.

Guo Han, a 31-year-old employee of an international bank, said Chinese employees had methods to deal with budget cuts. "They asked us to cut the money that we spend on our clients at Christmas - the dinners and gifts - by half. But no one really listens. We have our own ways around it. We simply pushed through the bills the month before," he said.

Elsewhere in the city, the mood is upbeat. Annie Ni, 27, whose company provides maids, said she felt the crisis "would not last long" and that the "future is promising".

Frank Gong, chief Asia economist at Merrill Lynch has predicted eight per cent growth for 2009, on the basis that China is still largely state-controlled and the state has plenty of cash. "The fiscal stimulus is real and it is massive," he said. "And it will be implemented much faster than similar plans in most other economies."

JP Morgan has also predicted near eight per cent growth, pointing out that the stimulus package will provide five percentage points of that sum. Beijing-based consultancy Dragonomics has gone for the same figure. "Lots of people are forecasting around five per cent growth, but we think that compared with previous downturns, households and banks are better placed," said Rosealea Yao, its chief economist.

China's transition to a market economy, says Gong, is far from complete. Although Chinese exports and the influx of foreign companies have received much attention, their contribution to the economy is far smaller than popularly imagined. Much more important are the vast state-owned companies which will swing into gear to implement the government's stimulus package.

The total value of China's exports was about 36.5 per cent of gross domestic product (GDP) last year, but in net terms, exports account for only between seven per cent and ten per cent of the economy.

"The idea that China is an export-led economy is probably the biggest myth of them all," said Jonathan Anderson at UBS. He said once the cost of importing materials to make China's toys, electronics, clothes and furniture has been stripped out, the value accrued to the economy is "by no means tiny, but still very moderate".