Posted by: Dexter Roberts on October 22, 2009
For those who believe China is an unstoppable economic machine, more evidence out today with third quarter growth clocking in at an impressive 8.9%, up from 7.9% in the second quarter. That’s seen as evidence that Beijing’s massive $586 billion fiscal stimulus and soaring loan growth—$1.27 trillion in new loans and up more than 150% this year—has shielded China from the worst effects of the global economic recession. Next up? Beijing will begin to wean itself off state support (a full 6.2% points of China 7.1% gdp growth in the first half still came from investment) and start relying more on longer term sustainable economic drivers like private consumption.
Already there are signs China is succeeding, the optimists say. As well as public investment—the majority of the 33.4% growth in fixed asset investment over the first nine months came from government stimulus spending—the Chinese economy is showing “a revival in private real estate investment and a resilient consumer sector,” writes Jing Ulrich, J.P. Morgan’s Hong Kong-based Managing Director & Chairman of China Equities & Commodities. “The most recent economic data suggests that China’s economic recovery is broadening,” she continues, pointing to a decline in unsold housing inventory.
A 15.1% rise in retail sales in the first three quarters too is seen as encouraging, as well as 9.3% growth in urban incomes and 8.5% in the countryside. China has begun “to implement its ‘exit strategy’, which is a gradual reduction in the level of stimulus (credit and infrastructure spending) in response to rising private investment and consumption,” writes CLSA Asia-Pacific Markets analyst Andy Rothman. .
At the same time, however, many are starting to question just how easy it will be for China to break its reliance on state spending to become a more sustainable and balanced economy. Beijing’s declared goal of course, is to build an economy driven more by innovative, private enterprises, one where the Chinese consumer much more supports growth rather than American and European consumers as before. But consumption has actually declined from 45% of gdp a decade ago to around 35% today. China’s record of creating truly innovative companies to date has been lackluster, and the vast majority of new lending (as before) is going to well-connected state companies rather than smaller, private ones.
Also worrying is growing overcapacity in the Chinese economy. On Monday, China’s National Development & Reform Commission warned that overcapacity is plaguing six industrial sectors including steel, cement, glass, chemicals, coal, poly-silicon production and wind power equipment. And while China says it is taking measures to deal with the glut—banks have been told to limit lending to these sectors—there are also growing signs that Beijing is becoming more protectionist, including by issuing “buy local” decrees for all government purchases.
Meanwhile, China’s National Bureau of Statistics is not calling the economic battle won yet: “The basis of the economic recovery still needs to be consolidated, and the insufficient external demand is still severe, with the arduous task of expanding domestic demand and adjusting the structures,” the NBS announced today. China needs to “maintain the consistency and stability of the macro-economic policies [and] … insist on the proactive fiscal policies and moderately lenient monetary policies,” it continued. Don’t expect an end to state spending yet.