The global economic environment is undoubtedly becoming more challenging everyday, and a recession in developed countries seems inevitable. With expected slower global demand, China's economy is likely to deteriorate further.

Many analysts have already downgraded the GDP growth below the government target at 8 percent for 2009.

The rationale for the downgrade is mainly derived from weaker export. A slower export growth will translate into poor performance of corporate earnings and weak confidence, dampening appetite in investment spending.

As a result, capital spending and employment are likely to suffer, which will affect domestic spending, widen income inequality and lead to further weakness in the property and stock markets.

Unlike other countries focusing on policy and stimulus packages to salvage the current financial markets, China is taking a proactive approach to managing its economy.

It announced a stimulus package of 4 trillion yuan on Nov 9 and decided to take 10 measures to boost domestic demand growth. This package is by far the biggest, approximately 16 percent of the country's 2007 GDP, which gives some indication of the severity of the financial crisis, compared with any of the previous ones.

Furthermore, the stimulus package is expected to be implemented before the end of 2010, which is equivalent to approximately 7-8 percent a year. In fact, even if the economy decelerates dramatically, China can still achieve the target of 8 percent GDP growth a year with the stimulus package.

Alongside the recent interest rate and the reserve ratio cuts, we believe the earlier than expected announcement, ahead of the Central Economic Working Conference (which is scheduled to be held in late November/early December) as well as the G20 meeting, has sent a strong message to the market.

It highlighted the government's heightened concerns on the worsening foreign and domestic environments and its willingness to take all the necessary steps to stop significant economic slowdown in the coming year.

However, we expect more policy adjustments to accompany the stimulus package.

Firstly, an increase in the minimum threshold of personal income tax which is expected to increase over the current 2,000 yuan per month in order to boost personal disposable income and spending.

Secondly, more interest rate and multiple reserve ratio cuts are necessary to work with the stimulus package to combat an unexpected slowing global economy.

Thirdly, a slow depreciation of the renminbi exchange rate against the US dollar is likely to ease the export pressure especially in the low-end segments of markets.

The author is the director of Convoy Asset Management Ltd.

(HK Edition 11/18/2008 page3)