LABOUR SHORTAGES in the Pearl River Delta in the booming south, industrial production up by 12.3 per cent in August, Volkswagen planning to invest €4 billion at its Nanjing and Chengdu plants – suddenly China, in the middle of the world’s worst downturn since the Great Depression, seems to be experiencing a return to the heady days of 2007, but without inflationary pressures.
But this is a very different China to that of less than two years ago, as trade data shows.
In its bid to recover from the slowest rates of growth in 10 years, Premier Wen Jiabao said the government would unswervingly apply its policy mix of massive government spending and loose money because the economic recovery remains fragile.
“China’s economic rebound is unstable, unbalanced and not yet solid. We cannot and will not change the direction of our policies when the conditions aren’t appropriate,” Mr Wen said in a speech at the World Economic Forum in Dalian.
Exports in August fell 23.4 per cent from a year earlier, a sharper drop than expected – faster than July’s 23 per cent fall, as global demand remained weak.
Demand from abroad has been replaced with domestic demand, or at least that’s the theory, with the €400 billion stimulus plan driving the growth. The main drivers are infrastructure investment, very strong auto sales, and a rebound in housing sales and construction. The sectors that did best were the heavy industries, especially cement, steel, transport equipment and chemicals.
“The recovery in domestic activity is clearly being led by brisk infrastructure investment, very strong auto sales, and a rebound in the housing sales and construction,” said Wang Tao, chief China analyst at UBS in Beijing.
“In other words, it has benefited from the government’s stimulus measures. While total industrial value added rose by 12.3 per cent year-on-year, the heavy industries, especially cement, steel, transport equipments and chemicals saw the strongest growth,” said Ms Wang.
Underlying bank lending remained at a very high level, which is consistent with strong growth in fixed investment and property construction.
“We expect underlying demand for commodities to increase further, but as expected, imports of some commodities have started to decelerate,” she said.
While recovery in China appears on track, it has not yet taken on proportions that might require Beijing to hit the policy brakes any time soon.
“For investors, the next data point to watch will be the (tri-monthly) industrial profit and inventory data to be released at the end of September. We expect to see some improvement in aggregate corporate earnings and will learn more about the overall inventory build up ,” said Ms Wang.
China’s data was in sharp contrast to Japan, which showed the economy grew by 0.6 per cent in the second quarter, less than earlier estimates.
Not everyone is convinced about the durability of Chinese growth. Stephen Roach, Morgan Stanley’s Asia chairman, has said China’s recovery is unbalanced, and too reliant on investment.
Real estate investment rose 14.7 per cent in the first eight months from a year earlier, compared with a low of one per cent in the first two months, which is a good sign for private spending.
One of the biggest challenges which policymakers may face down the road is the risk of inflation, as food prices have begun to rise from their year-earlier levels. Food prices, which make up a third of the consumer price index, rose an annual 0.5 per cent in August, resulting in a drop in overall consumer prices of just 1.2 per cent from a year earlier versus a fall of 1.8 per cent in July.
