China's Economy: Recovery Gains Momentum

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"Geographically, there is a shift in growth drivers away from the coastal areas of export powerhouse to the inland region," says HSBC China economist Qu Hongbing, who is calling for GDP growth of 7.8% this year and is planning to revise next year's above 9%. "Consumer spending, believe it or not, is holding up better than people expected."

Another development that has taken some by surprise is the speed with which the China real estate sector has recovered, perhaps because so many foreign observers only see the idled cranes in cities such as Shanghai, Guangzhou, and Beijing, big cities that were overbuilt during the property bubble of 2006-2007. But a countrywide slump throughout most of the past year has given way to a massive rebound in transactions, thanks to government incentives for first-time buyers and low interest rates. Property sales were up 53% in the first six months from a year earlier, according to a survey commissioned by the statistics bureau and published in the China Information News, while nationwide prices averaged across 70 cities climbed year-on-year in June. This masks the fact that in second and third cities prices have been strengthening much more.

Investment Enthusiasm

More important, excess housing inventory has been snapped up, encouraging developers to start new projects. Real estate investment increased 10% year-on-year, an important sign of a rebound. In the second half of last year property investment was nearly zero, while it normally accounts for about 25% of fixed-asset investments in China.

A strong recovery in the stock market has helped buoy optimism, too. The CSI 300 index of China's top companies listed in Shanghai and Shenzhen is up 87% this year. How much longer the rally will last remains to be seen, however. China only resumed initial public offerings this month after a 10-month hiatus, and there are more than 1,000 companies waiting to list their shares. Because Chinese investors tend to dump their current stock holdings in order to buy into new IPOs, a glut in new issues could drag things down.

But so far there's little sign of that happening. On July 10, Shenzhen-listed A shares in traditional Chinese medicine company Guilin Sanjin Pharmaceutical more than doubled in early trading from their IPO price, as did the shares of industrial cable maker Zhejiang Wanma, which also debuted the same day.

Balfour is Asia Correspondent for BusinessWeek based in Hong Kong.

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