Profit from China's Jekyll and Hyde economy

China has experienced a record 25.7% plunge in exports during February. With the Chinese New Year holiday having occurred in late January this year, economists expected February's numbers to look better than January's 17.5% drop from a year earlier - or to at least stabilise. But instead, it highlighted a country with a split personality.

Let's look at China's Jekyll and Hyde economy...

February flop

On the one hand, it's evident that China is having a very hard time selling its goods to the rest of the world, which (like China) is in the midst of a sharp economic slowdown. Deep recessions have hit major export consumers such as the US and UK, and there is widespread weakness across Europe.

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For a country whose massive export growth has formed the foundation of its economic explosion, it's no surprise that, with this pivotal sector having steadily declined since November, so too has China's economic growth.

A government forecast puts China's first-quarter GDP growth at 6.5%, compared with the 6.8% fourth-quarter figure. And as exports tumble, the World Bank now estimates 6.5% growth for 2009 overall, the weakest since 1990 and a sharp cut from its earlier 7.5% projection.

But on the other hand, there are signs that China's stimulus program is working, with internal investment rising.

China hopes for some bang for its yuan

While its export market is flagging, China's government is trying to boost its prospects in a way that it can directly control: spending.

And with a $585bn stimulus package rolling through its economy, China is adhering to the notion that if you want the best results, you have to spend a bit to get them. China's banks have lent more money over the past three months than in the past year, according to the New York Times. The number of loans in February alone quadrupled to just over one trillion yuan ($157bn).

A large portion of the money is going towards repairing and rebuilding China's ageing infrastructure. The National Bureau of Statistics said fixed-asset investment spending shot up by 26.5% to 1.03 trillion yuan over the first two months of 2009, compared with the January-February period in 2008. That thrashed estimates by 5%.

In turn, the improvements could give China a crucial competitive advantage. While others bail out their economies and slide into debt, China is using its strong cash position (ironically borne largely from its export growth) to now help offset export declines and its reliance on that area by improving prosperity from within.

Already, railroad spending tripled over the first two months of the year - much-needed investment for an industry that has struggled to cope with industrial production and demand. That's in addition to increased spending on the country's roadways. Construction equipment sales are projected to climb by 20% over the second half of 2009. Education, research and development, and social programs are also enjoying increased spending.

In some ways, the global downturn has forced China to stop relying on its exports and real estate market for growth and instead adopt a wider, more strategic focus.

And there could be more on the way...

Back up the stimulus truck

China's Prime Minister Wen Jiabao is certainly bullish when it comes to spending money.

Four months after announcing the $585 billion stimulus package, Jiabao pledged to "significantly increase" spending. He reiterated that more recently, saying that the government has "reserved adequate ammunition" to "introduce new stimulus at any time."

He may need to, in order to meet his government's 8% GDP growth target and stem the tide of rising unemployment. With 20 million migrant Chinese workers now jobless and blue-collar job wages falling, it puts additional pressure on China's fragile pension and healthcare systems - and heightens the prospect of social unrest.

But with all the new money washing through its economy, China is still a viable investment...

In the Year of the Ox, should you bea China bull?

"As long as the government's stimulus measures to boost domestic consumption are properly implemented, investment growth will continue to accelerate, making up for the loss of exports."

So says Ma Jiantang, head of China's National Statistics Bureau. And given the surprising speed with which many investors have jumped off the China bandwagon, that bodes well for those who still retain some perspective.

Despite cutting its forecast for China, the World Bank says China will fare better than most other economies, driven by its stimulus efforts. In addition to huge infrastructure spending and bank lending, retail sales were up 15.2% over the first two months of the year, with auto sales rocketing 25% higher. And the Shanghai stock market is up 22% this year, too.

Plus, firms such as Intel (Nasdaq:INTC) and manufacturers Hon Tai (Taiwan) and IMI Plc. (LSE:IMI) are boosting their operations and employment in China.

What's more, in the wake of the government loosening regulations on Chinese companies wishing to make foreign acquisitions, the commerce ministry is sending a delegation to Europe, specifically on the hunt for buyout targets in a range of industries.

It's not all rosy in China, of course. The country is suffering at the hands of the global economic downturn like many others. But China is using the wealth and prosperity it's built up over the past several years to deal from a position of strength.

So while some headlines may play up the doom and gloom, it's also clear that the China bull is still alive and kicking in some areas.

This article was written by Martin Denholm for the Smart Profits Report