Negative signals for Chinese economy, will they take heed

While the Chinese economy expanded 8.9% in Q3, propped up by easy credit & continued government spending programmes, Europe, US & Japan continue to flounder. The world’s 3rd largest economy has recorded 7.7% overall growth in the first 9 months of 2009, with officials saying they are confident that the much talked about annual growth target of 8% will be acheived.

Last November, as it became clear that the global economy was heading into a recessionary period, central government implemented a 4 Trillion yuan/$586 Bn stimulus package, aimed at cushioning the blow of decreasing exports on the economy whilst also improving industrial efficiency at all levels. Via this stimulus package, China has implemented a number of schemes that impact practically all sectors in the economy;  real estate/construction, transportation infrastructure, agriculture, social services, industry, earthquake reconstruction, technology advancement & rural development being amongst those receiving special focus.

The strategy has paid off, with growth rising to 7.9% in Q2 from 6.1% in Q1 2009. Figures show that industrial output has risen 8.7% in the first three quarters of the year, and 12.4% in July-September, which would seem to signal accelerated demand from domestic purchasers, keen to take advantage of low cost loans to invest in the expected turranround for China in 2010.

However, while surging purchases of coal, iron ore & other raw materials have helped mining majors such as Vale & BHP Billiton the impact of China’s comeback has mainly been one of improving global sentiment than of actually driving growth, according to Stephen Green, economist for Standard Chartered Bank in Shanghai.

“Exports remain the key weakness for the Chinese economy,” Moody’s Economy.com economist Alaistair Chan said in a report yesterday.

Our view is that it is time for those investing in China to pay attention to people like Chan, as investment via the stimulus package has accounted for nearly 88% of GDP growth this year. Central government  investment in factories, construction & national infrastructure has risen by one third in the first three quarters of this year to a record 15.5 trillion yuan (US$2.27 trillion).

As the economy “flourishes”, this heavy reliance on public works & other investments could be masking long term issues for the Chinese economy. Impressive as China’s ability to ride out the storm has been, companies desperately need to restart exports to offset the economies depenfdance on fiscal hand outs.

This week China’s leaders have also  signalled concern over these obvious imbalances in the economy, with the State Council saying policy must shift to dealing with waste and other associated problems of high growth.

“In the first three quarters, the pace of economic growth quickened,” the State Council said “At the same time, we also are clearly aware that there are still difficulties and problems in the economic and social development of our country.”

So it looks as though there are a number of challenges ahead for China in the near future. The stimulus package has obviously been deployed in a much more effective manner than in Europe & the US, however China has not had the crippling effects of masssive credit & huge write downs in it’s nascent financial sector. Although the Chinese have made a number of efforts to open new markets through bilateral trade agreements & an accelerated FTA programme with neighbouring countries in Asia & it’s BRIC partners, it cannot fully offset the real factor of dependancy on Western markets indefinitely.