China tackles confidence crisis as economy swoons

By Alan Wheatley, China Economics Editor - Analysis

BEIJING (Reuters) - The Chinese economy right now is like a big beetle on its back with its legs waving in the air, wondering what knocked it over.

But beetles do eventually right themselves. And as monetary and fiscal policy find traction, the odds are that the world's fourth-largest economy will also be back on its feet next year, albeit a little shakily.

To say Beijing has been caught off guard by the sudden downturn is an understatement: the cabinet rushed out an eye-popping 4 trillion yuan (373 billion pounds) stimulus package on Sunday without waiting for a leadership conference at the end of the month that will set economic policy for next year.

"It is a significantly positive development that the message of the government is now loud and clear," commented Yu Song, a Hong Kong-based economist with Goldman Sachs.

Chinese exports were always going to take a hit from the gathering global recession. And last year's tightening of credit to curb inflation and prick an incipient property bubble was always going to kick in with a delay.

The problem is that these blows to external and domestic demand started to rain down with force at the same time. This sapped the confidence of a country that thought it was insulated from the global credit crunch thanks to capital controls, a non-convertible currency and underdeveloped financial markets.

With inventories already at high levels, squeezing cash flow, companies responded to the deterioration by halting investment.

"Our customers right now are like rabbits frozen in the headlights," said a leading British businessman in Beijing, who sought anonymity to speak candidly.