The Economist Intelligence Unit has forecast growth in China in 2009 to reach just 6 percent, but has also tipped the nation to be one of the first major economies to lead a recovery within the second half of the year writes Stephen Joske.

The Economist Intelligence Unit is forecasting growth in China this year to reach 6 percent. This is a weak result by Chinese standards, but it is strong performance compared to the rest of the world. With developed countries experiencing a major recession and China outperforming India – a much smaller economy – China is now the fastest growing major economy.

The construction sector, which is a more important driver of growth in China than trade, should be picking up by the end of this year. The graph shows how the slowdown in China began in 2007 as the government tried to reign in overheating real estate markets. Construction had driven the downturn and should drive the recovery later this year. The problems on the export front from the global recession will not stop a recovery, but they do mean that growth in 2010 will only pick up slowly.

The Chinese stimulus package will make a significant contribution to growth in 2009, although it precise impact remains unknown. It is being delivered by measures that include infrastructure spending, easier bank credit and reversal of previous tightening policies. While effective, the stimulus is likely to distort the economy by favouring state owned heavy industry.

But investors need to focus more carefully on regions within China. The pattern of growth within China is shifting, and the export slowdown is speeding up that process. The graph also shows the varying growth rates across China which has 31 provinces and regions, many of which have economies the size of major countries.

The cohesiveness of growth attained in 2007, when all provinces were growing at more or less the same pace, has unravelled. The poorer provinces in the interior are now growing faster than the richer coastal ones, and the gap is expected to grow as the trade surpluses in the export-oriented coast start to shrink significantly.

We expect interior regions with a high degree of policy support to perform the best in 2009. The two biggest regional growth strategies launched by the central government in the early part of this decade, “Develop the West” and “Revitalise the North-east” seem to be taking effect. The graph shows the north-eastern and western provinces pulling ahead in 2008, in stark contrast to the relatively sluggish growth experienced in the previous decade. Growth in central provinces has taken a dive; however, this exception is largely the result of one province, as Shanxi’s coal-based economy suffered a severe contraction in the final quarter of 2008.

That the provinces listed in the central government’s growth plans so closely match those currently performing well is striking. The municipality of Tianjin is home to the Binhai New Area, which was designated a “comprehensive reform pilot zone” in 2008.

This is similar to the status granted to Shanghai’s Pudong in the 1990s. Tianjin finished 2008 with a GDP growth rate of 16.8 percent, topping the charts. The provinces hosting western economic development zones listed in the five-year plan—the Chongqing-Chengdu development zone, the Beibu Bay zone in Guangxi and the Xi’an- Tianshui zone in Shaanxi—all finished in 2008 well above the national average, with the exception of earthquake-stricken Sichuan.

Policy priorities aside, market forces are also shifting growth away from the coast, as infrastructure links with the coast improve and manufacturers seek to escape rising costs. In some provinces, such as Jiangxi, capital from coastal provinces now accounts for nearly one-quarter of total investment.

Hefei, the provincial capital of Anhui, has within the space of a few years built up a household-appliance industry to rival Dongguan and Qingdao despite being situated in the poorest province in central and eastern China.

The current global slowdown is forcing some foreign investors in China to scale back their expansion plans although few appear to be abandoning such plans given China’s unique growth prospects. There are signs that in this time of uncertainty some investors are now placing greater emphasis on the markets in China they are most familiar with – Beijing, Shanghai and Guangdong. But the strongest growth prospects in China lie outside these cities. ■

* Australian economist Stephen Joske heads up the Economist Intelligence Unit’s new China regional forecasting service in Beijing.