Recent signals from the Chinese economy have been mixed. Troubling developments in the second half of 2008 sparked fears of further fallout. But these have given way to a bevy of upbeat data in recent weeks, and with it, a more optimistic tone. Is China on the mend?
Last year’s deceleration was indeed a worry. Accustomed to double-digit growth, China suddenly found itself growing by less than three per cent in the latter half of last year. Official data didn’t seem nearly as grave, but indicators of industrial production and exports told a more worrisome tale.
Most China-watchers feel that the economy needs seven to eight per cent growth to prevent serious internal dislocations in production, employment, banking, and general social cohesion. If sustained, last year’s rapid slowdown could lead to much more serious and far-reaching outcomes.
Last week, China announced that first-quarter growth slid to the weakest growth pace since the data were first published in 1992. Discouraging, at first blush. But the official data are year-on-year comparisons, and in this case, don’t properly reflect recent activity. Actual implied quarterly growth probably doubled to six per cent at annual rates, with some estimates running as high as 8.8 per cent. These figures better reflect the recent about-face in many indicators, including fixed-asset investment, industrial production, the purchasing managers’ index, bank lending, and retail sales.
The data are comforting for now, but will nascent growth be sustained? A big anomaly in recent figures is export growth. February data showed a deepening, 25.7 per cent year-on-year decline. Clearly, receding large-economy GDP continues to weigh on China. Where, then, is recent Chinese growth coming from? It is possible that global deceleration prompted an over-correction last year, aided by the seizing up of capital markets. Others have suggested that China has indeed come of age, and is internally able to sustain itself and neighbouring economies.
These explanations are plausible, but murky. The big lesson in resurgent growth is the power of fiscal stimulus. And there are few places on the planet where stimulus is likely to be as effectual. First, China was well ahead of the rest of the world in announcing its stimulus plan. Second, it is a hefty plan. All told, total stimulus amounts to a whopping 13.3 per cent of GDP, and if reduced to what is really net new spending, it still rivals others’ plans. Third, as public investment is already a large share of Chinese GDP, huge infrastructure spending in the plan can be accommodated. Fourth, China faces fewer hurdles to implementing spending, even on this scale. First-quarter GDP data are a key signal that spending is underway and is having a big impact on the overall economy.
As impressive as it is, fiscal stimulus is not a cure-all for the Chinese economy. One-off spending plans boost growth when they begin, but once up to speed, the growth effect wears off. At that point, China will need other fundamentals – notably exports – to fill the gap. With an export resurgence unlikely in the coming months, near-term growth will remain in check.
The bottom line? Recent Chinese growth is a relief, and showcases the power of fiscal stimulus. China’s plan packs a big punch, but a return to more solid, sustained growth will await a more fulsome global upturn. And at that point, the world will again be wowed by China’s performance.
The views expressed here are those of the author, and not necessarily of Export Development Canada.