Talking Point

Hoping it’s working

Mixed signals from the Chinese economy

On the up? China's leaders are pointing to better times ahead

If the helmsman is not nervous, the passengers will feel secure” goes the old saying. The Chinese leadership was doing its best to appear pretty nerveless last week, as the economic data on the most recent quarter began coming through.

Chinese premier, Wen Jiabao seemed keen to add a few rhetorical flourishes of his own. A confident outlook was “more valuable than gold and currencies”, for example, and he had an inspiring word or two on hope as well; “the beacon that lights the way for the world’s people, companies and economies.”

But it’s reassurance rather than inspiration that most people are looking for. And all eyes are on China – which generated 10% of global output in 2007 and 2008 – and whether its Rmb4 trillion ($586 billion) stimulus package is working.

With the economic data now in, are there signs that it is working?

Let’s start with the positives…

There are a number of more hopeful indicators for March. Industrial production increased by a greater-than-expected 8.3%, much better than the first two months of 2009. Fixed asset investment was up 30% year-on-year, a clear sign that stimulus package spend on infrastructure is starting to feed through. Loan growth also continued to soar, with a 25% increase in loans in the first quarter, according to the South China Morning Post. Caijing magazine says the Rmb1.9 trillion of new credit in the month of March was an all-time high.

Other key statistics are also showing a slower rate of decline. Exports – although down 17.1% year-on-year in March – still did better than the 25.7% decline of a month earlier.

Mix in a positive performance from the Purchasing Managers Index, and retail sales figures, and the picture seems a lot less gloomy than earlier in the year.

So the news is better…

This is certainly the message that China’s leadership wants to get across. “Better than expected” is the key sound bite – and it has got repeat airings from a number of senior officials.

Zheng Xinli, the Communist Party’s deputy research head, also feels the economy has “touched bottom” and expects to see economic growth begin to recover. Zhou Xiaochuan, governor of the central bank, agrees that there are “positive signs” of the initial stages of a recovery. The nation’s best performing fund manager has also become somewhat more bullish. “Government stimulus has started to take effect,” says Wang Haitao, who manages the China Post Core Stock Selection Fund, which is up 51% this year. He says the stimulus has helped companies “gradually shake-off the rapidly deteriorating operating environment seen in the fourth quarter.”

But not all is rosy?

Much depends on how you choose to interpret the data.

Take the news that GDP grew 6.1% in the first quarter, compared to the same period last year; some analysts choose to put this in a global economic context, in which most other economies are in a much worse position. The OECD has estimated that the US economy will contract by 4% this year, for example. The Japanese economy is forecast to do even worse, and shrink by 6.6%.

So at least China is still growing. As the stimulus package continues to flush through the economy, growth should pick up too. HSBC expects a further acceleration in the remainder of 2009, with annual performance coming in close to Beijing’s fabled 8% target.

Indeed, the Chinese Academy of Social Sciences this week forecast that GDP growth for the year would be 8.3%.

But if we choose to be cheered up in relative terms, presumably we should look not only at other countries, but also at China’s own previous performance. And the picture here is a lot darker. The most recent quarter’s GDP figures turn out to be the weakest showing since quarterly reporting began in 1992.

And the thoughts of Chinese business managers themselves?

Much of the commentary on economic performance comes through official channels (and is spun accordingly). It is harder to pick up on how Chinese businesses are responding to the challenging environment.

A survey from ChinaStakes, a business-news website, offers a limited opportunity. And it suggests a more pessimistic view of economic conditions than the one coming down from the top.

The survey (actually commissioned by the State Council) reveals that 53% of the 1,500 “top managers” questioned think it too early to talk about a bottoming out of the economy. Conditions were “bad” or “very bad” according to 41%, and a similar percentage say that their companies would be cutting investment as a result.

But what about jobs?

Almost a third of the firms surveyed had cut jobs in the first quarter – the type of feedback that will give Beijing most cause for concern.

After all, the primary goal of the stimulus campaign is to keep as many people in work as possible, as well as soak up some of the unemployment created by collapsing exports, and the slump in the real estate and construction sectors.

One problem, says the Economic Observer, is that new loans are often not reaching small and medium-sized enterprises. Despite official data suggesting an increase of Rmb400 billion in short term loans for January this year, an industry association study on private firms actually reported a drop in short-term loans to small companies at the end of the same month.

The worry here is that most of the newly available credit is being channelled into the larger, state-controlled entities and not to the smaller, privately-held businesses that have tended to be more productive in growth and employment terms.

Coverage of job growth in Henan province, in the 21CN Business Herald, raises further questions about how many jobs the stimulus programme can actually hope to create.

According to the newspaper, Rmb1 trillion of spending in the province will lead to 650,000 new jobs. But Michael Pettis, a professor at Peking University’s Guanghua School of Management, doubts whether Henan is really receiving quite that much investment. He also points out that even if 650,000 jobs were created that is still not a huge amount for a province the size of Henan (China’s most populous, with 98.7 million people). Nor would it seem to make much of an inroad into the millions of recently laid-off workers, if replicated at a national level.

So can we expect more stimulus, if the current one disappoints?

Most analysts agree that Beijing has enough left in its locker for another bout of spending. Jia Jang, head of research at the Ministry of Finance, says a decision will be taken in the middle of the year, once the second quarter results are out.

But Jia also expects growth to remain “low” for three years, reports the China Securities Journal. And, behind the talk of a short-term stabilisation in the economy, there is a wider recognition that the best of the boom years will be difficult to rekindle.

So Wen Jiabao, despite his stirring call for renewed optimism and self-belief, has also recognised that a “sober” assessment of current conditions is important. He suggested too that citizens should be prepared for “greater difficulties over a longer period of time.”


© ChinTell Ltd. All rights reserved.

Exclusively sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.