Chinese Economy Gaining Steam

Posted by: Frederik Balfour on May 1, 2009

Here’s the latest evidence that China’s economy is gaining steam and that the government’s pump priming is starting to pay off. China’s Purchasing Managers Index, or PMI, issued on May 1 by the China Federation of Logistics & Purchasing with the support of the National Bureau of Statistics, rose to 53.5 in April from 52.4 in March. This is the second month in a row that the index has registered above 50, indicating expansion. The PMI had first fallen below 50 last July on the eve of the Olympics, marking the beginning of China’s slowdown that prompted the Mandarins in Beijing to launch a $586 billion economic stimulus package last November by which time the index had fallen below 40.

The PMI is important because manufacturing accounts for 42 percent of China’s gross domestic product and it can be a useful bellwether of economic trends that reflects decisions taken by individual businesses based on actual market conditions. However the official PMI may overstate improvements in sentiment because state-owned companies dominate the heavy industry sector that have benefited disproportionately from the fiscal package because of its heavy emphasis on infrastructure investment. Across China steelmakers, cement producers, and construction companies are seeing sales soar as Beijing’s stimulus plan opens the spigot on funding for railways, airports, and power plants.

The CLSA PMI, which gives a stronger weight to small and medium sized enterprises, has painted a less rosy picture of the manufacturing sector in recent months. CLSA usually releases its latest survey results a couple of days later than the official index. Still, trends are more important than any single monthly results, and the official PMI has improved for five consecutive months, a fact which “reinforces our confidence that the Chinese economy is starting to turn around,”writes Jing Ulrich, Hong Kong-based chairman of China Equities with JPMorgan, in a May 1 research note. However “it appears sensible to guard against excessive optimism. Month-on-month and quarter-on-quarter improvements in economic indicators will be difficult to maintain and the pathway to recovery will not be entirely smooth,” Ulrich says. She points out, for example, the challenges facing China’s export sector, as evidence by the anemic demand at the semi-annual Canton Fair held in April which saw the value of deals signed in its first and second phases drop by 20.8% and 14.9%, respectively, from the levels registered during the Autumn session.

Reader Comments

Sunil De

May 1, 2009 5:06 AM

Hi Fred,
$586 doesn't sound like much of a stimulus package even for my house - seems to me you've missed a 'Billion' here or there.
Sunil

frederik balfour

May 1, 2009 9:37 AM

Thanks Sunil. I caught that error myself before reading your comment, but I still award you top marks for close copy editing. Let us know when you want to apply for a job. Thanks for keeping me on my toes,
Frederik

JLarkin

May 1, 2009 3:01 PM

Will China be building lots of bridges to nowhere? Central planning, etc. Without exports driving the economy, how robust can it be?

jcage

May 2, 2009 12:03 AM

To JLarkin

China is not a dependent as export as other Asian tiger like Taiwan, Singapore, South Korea since China has a big middle class. Many export companies are selling to the Chinese market since the foreign market are slowing down! You might think that the average Chinese might afford most of the export good but remember that a Nike shoes that sell in the USA for more than a $100.0 does not mean that it cost $50.0 to make in China and it might cost $5 at most. The area that get affected the most is Guangzhou since it is the export hub of China but I was in Shenzheng on April and still I see people going to shopping malls, filling up the restaurant but the traffic was less than 50% from the peak! Other part of China like Henan and Beijing still many people shopping, eating out, traveling!!

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Bloomberg Businessweek’s team of Asia reporters brings you the latest insights on business, politics, technology and culture from some of the world’s biggest and fastest-growing economies.

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