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China's Economic Growth Picks up Steam

Posted by: Frederik Balfour on July 10

chinaflag_120.jpg “Upside risk” is not an expression you hear bandied about much these days. But when it comes to China’s economy there’s no debate about the existence of “green shoots”, the only question is about their height. Upward revisions about China’s GDP growth just keep on coming. The latest comes from JP Morgan’s chief China economist Frank Gong, who is now expecting the China’s economy to grow 7.8% this year, compared with his previous forecast of 7.2% a few months ago. “The economy is doing a lot better than the market expects,” says Gong. “The risk is on the upside.” Look for growth of at least 9% next year, maybe more if the rest of the world recovers, he says.

This rosy prognosis comes even as China’s exports keep slumping. On July 10 Xinhua News Agency reported a 21.4% decline in exports during June from a year earlier, continuing an eight month slump. However exports grew 7.5% from May, and some believe things have turned a corner. JP Morgan’s Gong notes that the export component of China’s PMI in May was above 50 for the first time in a year, signaling an expansion rather than contraction in new export orders.

What’s surprising, and encouraging about the strength of China’s economic recovery [GDP growth bottomed out in the first quarter at 6.1%] is just how much of China’s growth is being fueled by Chinese consumers. To be sure, the government’s $586 billion economic stimulus package and more than $1.2 trillion in new loans this year have helped prime the pump.

But there’s mounting evidence that China’s long cherished goal of on the back of local consumption. Take the auto market. At the beginning of the year the industry association was predicting a contraction in auto sales on the back of an anemic (for China) 6.7% growth last year. Instead, the China Association of Automobile Manufacturers on July 7 reported a whopping 17.7% increase in sales to 6.1 million vehicles, and is predicting this year’s sales could even top 12 million. For instance, General Motors sales through its joint ventures rose 38% in the first half to 814,442 vehicles.

The main source of strength for auto sales has come from smaller cities in China’s heartland; these cities have been spared the worst of the export slowdown that has battered mainland coastal cities. “Geographically there is a shift in growth drivers away from the coastal areas of export powerhouse to the inland region,” says Qu Hongbing, HSBC China economist who is calling for GDP growth of 7.8% this year and planning to revise his 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 China’s property sector has recovered, perhaps because so many foreign observers only see the idled cranes in overbuilt cities like Shanghai, Guangzhou and Beijing. But a countrywide slump throughout most of last year has given way to a massive rebound in transactions thanks to government incentives to 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.

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 investment in China.

And let’s not forget about the stock market. The CSI 300 index of China’s top companies listed in Shanghai and Shenzhen has zoomed up 87% this year. A sign of confidence by the government was the decision to resumeIPOs this month after a 10-month hiatus, and there are more than 1,000 companies waiting to list their shares. 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.

Thank you for your interest. This blog is no longer active.



BusinessWeek’s Joe Weber, Patricia O'Connell, Michelle Conlin, Frederik Balfour, Peter Coy, Greg Spielberg and Roger Crockett examine The Case for Optimism by looking past the financial turmoil and economic unrest gripping the globe to focus on the promising future that lies on the other side of this storm. We’ll chronicle the forward thinkers investing in R&D, launching promising new products, entering new markets, or implementing management and leadership.

See why BusinessWeek Editor-In-Chief Stephen J. Adler is optimistic about the economy amid the sharpest downturn since the Great Depression.

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