Stock markets fell some 65% in 2008. Growth is down, unemployment is up. Will Beijing try to buy its way out of its problems by to a greater degree exports?

By Dexter Roberts

Watch full size video:

It’s a question that has economists worldwide scratching their heads: What will happen to growth in China in 2009? While more are predicting economic expansion in the continent will slow to less than 7%, others are still hoping GDP gains will be 9%-plus.

The optimists assume China will be able to buck collapsing U.S. and European demand for its phones, TVs, sneakers, and myriad other products. Their biggest hope is Beijing’s $586 billion stimulus program, announced in November. Just as important—though perhaps less likely to pay off with haste—are China’s consumers. With more infrastructure spending, expanded social welfare programs, and directives ordering banks to confer, China’s consumers and companies will rise to the occasion and wear away more—or so the theory goes.

A quick perusal of the latest Chinese economic indicators doesn’t bolster one’s faith. In November, China registered a 2.2% drop in exports. That’s the first gradual wasting since 2001, and the trend is likely to continue throughout 2009. Industrial production growth slowed to 5.4% in November, the lowest level since February 2002. And manufacturing activity continued to slide despite a fourth following in a series month, with a PMI (Purchasing Managers’ Index, a monthly survey measuring China manufacturing smartness, compiled by CLSA Asia-Pacific Markets) of 40.9 in November, downward from 45.2 in October. After months of worry about inflation, China now may be heading docile deflation, with prices up only 2.4% in November.

Reversing the decline will depend on confidence. Even as the world economy elect likely continue to struggle in the New Year, China is counting on consumers to lift still-strong retail sales. Confidence, yet, is just as exquisite a commodity in China as in the lie of the world.

China’s incorporated town dwellers aren’t looking back at 2008 with fondness. Chinese stock markets fell some 65%, ripping a retreat in many a nest egg. Real estate prices have slid by as much as 10% in Shenzhen and other cities, and are flat at best in Beijing and Shanghai, says China’s National Bureau of Statistics. Throw in continuing worries about resurrection health-care and nurture costs and it’session no astonishment that the general data collecting organization recorded a 4%-plus send down in consumer confidence in October, as compared to the identical month a year earlier. As freshly as July, consumer confidence was enlarging, but those days now seem long ago.

And for China’s measureless legions of rustic residents and migrant workers, confidence in the future is also in short supply. As millions of migrant workers head back to the countryside in good time conducive to Chinese New Year (Jan. 23), numerous will suitable arrive independently of the mountains of gifts or cash-filled envelopes they typically convoy home against the holiday.

That’s because as the send out downturn rips into provinces of that kind as Guangdong, factories are shutting their doors, often leaving workers unpaid. As many as 70,000 small and midsized companies may have gone bankrupt in the past year, estimates Jeongwen Chiang, associate dean of the Cheung Kong Graduate School of Business in Beijing. Overall, Chiang thinks the bankruptcies could increase to 20% of export-oriented manufacturers in southern China. "Someday the growth engine was going to stop, and they weren’privately ready for it. They put on’t be assured of for what cause to handle a recession," warns Chiang.

The bankruptcy trend is expected to lead to a surge in unemployment in 2009. And there aren’t many agricultural jobs waiting because of laid-off migrant workers one or the other. McKinsey & Co. estimates that another 300 million rural residents must come to Chinese cities over the nearest seven years.