Men walk past a billboard promoting a new property development in Shanghai in October 2008
The global economy is short on just about everything it needs for recovery these days — credit, jobs and new customers. But most of all, the world is suffering from a shortage of optimism. As unemployment mounts, asset values deteriorate and governments scramble for solutions, most consumers and investors still don't see the light at the end of the recession tunnel.
Except, that is, in China. Some economists and investors have turned mildly bullish on the Chinese economy. A February survey conducted by Merrill Lynch saw the number of fund managers who believed China's growth would be lower in the next 12 months shrink drastically. Jing Ulrich, chairman of China securities at JPMorgan in Hong Kong, noted after client meetings that "attitudes toward China's efforts to counter the economic slump seem to have turned more positive." The happy mood also showed up in Chinese stocks. By mid-February, the Shanghai stock market had surged more than 30% since the beginning of the year, making it the world's best performer. (The index has fallen off slightly since.) (See 10 things to do in Shanghai.)
These optimists are focusing on some surprising data emerging from the Chinese economy. The purchasing managers index (PMI) — a measure of the health of the manufacturing sector — has inched upward since November, indicating that China's important industrial sector isn't decelerating as quickly as it did in the preceding months. Most important, Chinese banks doled out nearly $240 billion of new loans in January — a one-month record. Some economists have taken these data as evidence that China's economy has already bottomed out. Merrill Lynch economists Ting Lu and T.J. Bond reaffirmed their bullish 8% GDP-growth estimate for 2009 in a February report, arguing that the turnaround could begin in the second quarter. "China looks set to be the first major economy to recover from the current global meltdown," they proclaimed.
Much of that rosy outlook is pinned to a rock-solid faith in the Chinese government. These signs of new life in the national economy are seen by some economists as evidence that Beijing's massive monetary and fiscal-stimulus measures are kicking in. In November, the government announced a $586 billion spending package, mainly in new infrastructure projects, and since then, policymakers have introduced a long slate of measures to boost consumer spending. The government raised pension payments to retirees from state-owned enterprises, hiked teacher salaries, cut sales taxes on some vehicles and subsidized purchases of appliances for rural consumers. Some local officials have even issued spending coupons. The effort to keep growth going at all costs will continue, the optimists say. "China needs to build up credibility and establish its reputation as it rises as a global power, and the timing has never been so right when Western economies are being brought to their knees in this global financial meltdown," the Merrill economists wrote. (See pictures of the global financial crisis.)
Not everyone is so convinced. The current improvement in data "is not big enough to warrant optimism" that a recovery is around the corner, says Eric Fishwick, head of economic research at brokerage CLSA in Hong Kong, who has maintained his 5.5% growth estimate for 2009. Jun Ma, an economist at Deutsche Bank, argues that China will experience a "double-dip" or "W-shaped" recovery. While the economy may show signs of life in the near term, he believes the current upturn will fizzle and the economy won't hit a final bottom until the first half of 2010.
The bears, instead, are looking at the Chinese economy's continued signs of weakness. Exports, a key driver of growth, continue to plummet as demand for China's toys, blue jeans and TV sets dries up in the United States. In January, exports plunged 17.5% from the same month a year earlier. Nor are the more negative convinced that the better data coming out of China are as meaningful as they appear. Take, for example, the record level of loans, which some argue won't stimulate growth as much as expected. There are signs that some borrowers, for example, are trying to turn a quick profit by capitalizing on differentials in interest rates. The loan growth may also not be sustainable, as government concerns about rising nonperforming loans could lead to reduced lending in coming months. "Given the sharpness and severity of the recent slowdown, the recovery path is likely to be volatile as well," wrote Goldman Sachs economists Helen Qiao and Yu Song in a recent report. They're holding to their below-consensus 6% GDP-growth forecast for 2009.
Economist Jim Walker of Asianomics, an independent research firm in Hong Kong, argues that what appear to be signs of recovery in China are in fact indications that the country might be headed for long-term problems. Walker believes that Chinese policymakers aren't allowing the economy's excessive and unnecessary industrial capacity to die off naturally, keeping alive sick companies that could drag down the economy in the future. "By throwing money into the economy ... Beijing is running the risk of turning a nasty cyclical downturn into a structural problem that will take years to unwind," Walker writes. "Beijing is now embarked on perhaps the greatest policy mistake in its history." So much for optimism.