By Craig Russell

WE ARE witnessing the most concerted global effort in history to bail out the world economy. However, more questions have been raised than answered.

What started out as the sub-prime crisis in the United States has left many investors floundering in uncharted waters. The biggest concern: A global depression.

We believe China is the deciding factor between a global recession and a depression.

Global financial systems will be supported as long as the Chinese consumer continues to increase spending.

According to the World Bank and the International Monetary Fund (IMF), China is the world?s third-largest economy with a gross domestic product (GDP) based on PPP (purchasing- power parity) of between US$6.9 trillion (S$10.1 trillion) and US$7.05 trillion last year.

Chinese consumers account for about 42 per cent of the GDP.

The US and India?s consumption stands at about 70 per cent of the GDP. Hence, Chinese consumption has room for growth.

China?s GDP per capita is between US$5,200 and US$5,400 based on PPP, according to the World Bank and the IMF.

The third quarter saw a net capital outflow of US$1.5 billion from mainland China versus an inflow of US$170 billion in the first half of this year.

The country has nearly US$2 trillion in treasuries and cash - 20 per cent of spending in the mainland come from the central government.

It is safe to say that a recession and massive drop in consumer spending in the West - which has been on a 10-year consumer spending and borrowing binge - have already begun.

Third-quarter GDP for the US declined by 0.3 per cent. Although better than the anticipated 0.5 per cent, it is still a clear indication of a recession.

Despite the bleak outlook for the US, consumer spending in China is rising. Chinese consumer spending last year increased by 17 per cent compared with 2006, and 16 per cent in 2006 compared with 2005.

One can also argue that Chinese consumers have reached a mature age with aspirations, and access to lifestyles similar to those of Japan, South Korea and Singapore.

Gone are the days when basic needs such as food and shelter were the priority. Demand has shifted to value-added items such as electronics, cars and luxury items.

The Communist Party of China recognises this increase in domestic consumer spending.

Last month, the People?s Bank of China cut local interest rates by 0.27 per cent - the third cut since September - and more cuts are expected.

We do not expect movement or repegging of the Chinese yuan, which remains at 6.84 yuan to the US dollar, with the possibility of a 1-per-cent increase or decrease over the next six to eight months.

At the same time, Chinese consumer spending growth could equal 0.6 per cent to 0.9 per cent of the global GDP - about US$50 trillion - thus reducing the risk of a global depression.

myp@sph.com.sg

The writer, based in Beijing, China, is the chief market strategist of the Saxo Bank Group, parent group of the Singapore-based Saxo Capital Markets

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