Some China-watchers see a light at the end of the tunnel for the country's faltering economy. These optimists note that there are mounting signs that the government's stimulus efforts and in particular the flood of credit unleashed by the Central Bank last November are beginning to have an impact.
Hopeful signs have indeed appeared. Retail sales are still growing at a robust 16% annual rate. The Purchasing Managers Index, an indicator of the health of the manufacturing sector, rebounded into positive territory in March after falling for months, indicating that industrial output may be expanding again. Home sales are also showing signs of recovery, as is lending. Even the stock market, which had plunged by some two-thirds from its peak in 2007, has clawed back 25% in the last few months. (See pictures of China's investment in Africa.)
So, depending on whom you believe, the Chinese economy is bottoming out or even beginning to grow again. But if there's consensus that things are looking up for China in the short term, there's little agreement on two crucial questions that inevitably accompany these signs of life in the world's third-largest economy: will anyone but Chinese benefit from Beijing's apparent success in heading off the worst effects of the economic crisis? And, if the rebound is real, will it last?
For the pessimists these days among the majority the answers are "very little" and "no," respectively.
Some aspects of China's glimmers of economic turnaround do seem as though they might offer hope to the country's trading partners. Take car sales, which rose in March for the third straight month, once again making China the largest market for automobiles in the world, ahead of the U.S. Those statistics, you'd think, would bring a smile to the faces of executives at beleaguered American carmaker GM, whose success in China in recent years has been about the only bright spot in its funereal performance.
But as Columbia economic professor Nouriel Roubini pointed out in a recent report written for private clients, car sales in China have been "artificially boosted on a temporary basis by incentives" and so are unlikely to sustain their rise. Similarly, a spike in purchases of white goods in China's countryside was largely caused by discount vouchers supplied to consumers by Beijing, Roubini notes.
"My feeling is that China can't help other countries in the region," says Michael Pettis, a finance professor at Peking University. He says that China's trade surplus rose 42% on an annualized basis to a record $19 billion last month, despite the fact that the country's exports are declining at double-digit rates. That's because its imports are dropping even faster, boding ill for China's neighbors like Japan and Korea who rely on the U.S. consumer and now are desperately looking for alternative buyers of their goods.
Economists simply do not believe that tight-fisted and relatively poor Chinese consumers have the purchasing power to rescue China's economy, let alone the rest of the world. They're too busy saving for a rainy day. Beijing realizes that among consumers "household savings are high (and their consumption low) because of structural factors" says Roubini in his report, citing such factors as the lack of adequate health care and unemployment benefits, poor rural infrastructure and public services, lack of a proper social security system, and underdeveloped credit markets for mortgage and consumer finance. These all conspire to place an almost insurmountable drag on the government's efforts to get its consumers to open their wallets. Domestic consumption accounts for about one-third of China's GDP, compared with around 70% in the U.S.
That situation can be changed over time with appropriate policies, Roubini notes, but the government has been "woefully slow" to implement them. In the months ahead, China's economy will instead be driven by the government's $585 billion stimulus spending program and easy credit. This may prove to be enough to stave off a major economic contraction, but government measures alone will not rekindle high growth rates.
CLSA analyst Chris Wood says that recent improvements in China's economy can be attributed partly to a surge in bank lending that began in November. This, he notes, could only happen in an authoritarian country such as China, where the government can and did order the banks to lend. "The bottom line is that if this was a purely capitalist system, [lending] would be slowing," Wood says. Stimulus spending over the next three months will continue to boost economic activity, Wood says, but the impact will start to wear off later in the year. Absent a recovery in China's hugely important export sector, "the bigger risk in China is of a 'W' shaped outcome," Wood says. In other words, after a brief, stimulus-driven spike, the economy will resume its downward track later in the year. Inevitably, growth will return. But Wood says a second downturn could be perilous and deep if current government measures artificially and temporarily prop up marginal manufacturers that otherwise would go bust (China's total production capacity exceeds domestic demand by a factor of 10), and if tens of billions of dollars in loans now being made on Beijing's command go bad.
Pettis of Peking University says China's economic problems are just beginning rather than beginning to end. "There's no letter in the alphabet that could be used to describe where I think the Chinese economy is going," he says, arguing that it will be many years before the global trade imbalances that caused the current crisis are redressed. In the meantime, China will get little help from the world nor will China be of much help to the rest of the planet.