More Doubts On China

A couple of days ago I wrote a post questioning China’s first quarter growth numbers. Judging from the comments on Seeking Alpha where it was picked up, there are few people who share my skepticism when it comes to that country’s future as an economic power. 

But I’ll soldier on as the WSJ had a brief article yesterday that mirrors my doubts to some degree. The article points out the fundamental flaw in the economic data coming out of that country and the longer-term impediments to growth.

Economists are roundly cheerful about China’s worst quarterly economic performance in nearly 20 years.

The 6.1% rise in first-quarter gross domestic product, way down from the double-digit levels of recent years, does belie some encouraging signs for the economy.

Manufacturing output, up 8.3% on the year in March, is growing at a healthy clip again. A range of indicators, from rebounding car sales to faster fixed-asset investment growth, all look positive.

In sum, a belief that the past three months represents the trough of China’s slowdown has taken hold — with credit due to last autumn’s $586 billion fiscal stimulus and a surge in lending from state-owned banks, mainly to state-owned enterprises.

Now the debate among economists is becoming more alphabetical. Is this recovery V-shaped, with China set to return quickly to the high-level growth of recent years? Or is it more W-shaped, as a government spending-led recovery this year peters out and China’s longer term structural issues resurface?

The risk in Beijing’s spending-and-lending stimulus measures is of an eventual, large misallocation of resources.

That the state-owned sector is driving the recovery is clear. There are two purchasing managers’ indexes in China: The one that reflects activity among state-owned enterprises is now in positive territory, while the private-sector-weighted index, calculated by CLSA Asia Pacific Markets, is still contracting.

Optimists argue Beijing’s stimulus spending via state companies will have a multiplier effect on the rest of the economy. For that to happen, it is important that it helps to stimulate consumer spending, which accounts for less than 40% of GDP, compared with about 70% in the U.S. So far, and China’s data here aren’t the best, the results on that front are mixed. Also, unemployment is rising and deflation is a danger. Prices have fallen for two months in a row, something that could discourage household outlays.

In my post, I said that I had trouble with the credibility of the data that comes out of China. The fact that there are two purchasing managers indexes in China makes me more certain that the numbers are suspect. That aside, the more important point is that the Chinese economy has to have demand from the West to sustain any long-term prosperity. Domestic consumption is chronically weak and attempts to change ingrained behavior run into the rude realities of the uncertainty of life in the country. 

The Chinese, however, seem sure of themselves. Following on the broadside of Premier Wen Jiabao delivered against the dollar in March when he suggested that reliance on it as the primary reserve currency needed to be reduced, he said today that the economic policies of countries that issue reserve currencies need to be closely supervised. He was kind enough to not mention the dollar specifically.  Again he called for a diversified international monetary system.

It’s a curious game he’s playing. I suspect a bit is just international politics. Testing the mettle of the new Obama administration. But it’s still a bit hard to figure. The yuan is not a freely convertible currency and by most measures is undervalued. The Chinese manage its value and it is the only currency among the major economies that does not float against the others. Lecturing others and calling for supervision of their monetary policies while pursuing self-serving interests is a bit over the top.

Make no mistake, I have great admiration for the manner in which the Chinese have developed their economy. They’re a major power and deserve a seat at any table. By the same token they have to recognize that responsibilities come with that seat. I’m not sure they’re ready for that.

China has some real heavy lifting to do if it wants to keep climbing the economic ladder. More transparency, a better legal structure, economic security for its citizens and a solution for its demographic time bomb are imperatives. They’ve shown a real talent for getting this far and they may well tackle these problems successfully. They may also be peaking.

more: here (WSJ article) and here (Reuters-Premier’s statement)

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