Sunday 19 April 2009

Stimulus crackdown - what is really going on in China?

A series of articles in the Times on Friday touch on a number of points that I have been concerned about for a while.

Nowadays all newspapers seem hell bent on talking about the "green shoots" of recovery. The cynic in me wonders whether these are placed stories with the press and government attempting to talk us out of recession via the usual "confidence is key" mantra.

I happen to believe things have a lot further to fall yet before we bottom out. All the "macro" models are churning out 2010 recovery stories but remember, these models are based on hundreds on assumptions and imputed numbers. However, in the new world they are guessing even more than they previously did. Ignore.

To this end, the Times has a good article on Friday that gets closer to the truth and also shows how the stimulus package in China, whilst big, is potentially built on sand and is building larger problems for the future.

The fact that the Chinese regulators recognise the problem is good news.

The other issue that this article touches on is whether we can believe Chinese data. I have posted on this before and it is the case that some data is more trustworthy that others.

What is interesting here is to compare oil demand against the GDP figures. See the end of the article.

Chinese regulator may crack down on banks to prevent $585bn stimulus fuelling speculation [Times]

China’s financial regulator may be poised to crack down on bank lending practices to try to prevent money from the Government’s $585 billion (£392 billion) stimulus package being used to fuel stock and property speculation.

Expectation of such a move comes as the Government yesterday revealed that China’s economy expanded at only 6.1 per cent in the first quarter of this year – the most anaemic phase of growth since quarterly records began more than 15 years ago.

A sharp fall in exports, rising unemployment and the closure of tens of thousands of factories were behind the drop in GDP growth, although several analysts said that the figures could indicate the low-water mark for what is now the world’s third-biggest economy, behind the US and Japan.

Wensheng Peng, Barclays Capital’s chief of China research, said: “We are seeing a significant rebound in the underlying momentum of growth.”

He added that a huge 88 per cent rise in newly started projects over the January-to-March quarter was a leading indicator that private spending may now increase much further.

The Government’s numbers nevertheless showed that, for the second consecutive quarter, growth in China has remained well below 8 per cent – a level identified by many observers as the “danger line” for Beijing as it tries to calm unrest among tens of millions of newly unemployed migrant workers.

The poor GDP figures were accompanied by other readings from the economy suggesting that the path to recovery may already be clearing and that Beijing may yet make good on its pledge that China will be the first leading economy to recover from the global downturn.

Andy Rothman, chief China economist for CLSA, the broker, said that there were especially encouraging signs on employment, with the proportion of companies reporting staff cuts falling to 10 per cent for March, from 14 per cent for February. Mr Rothman, in a note to investors, said: “The peak period of layoffs – primarily migrant workers in export processing and construction – has passed.”

Driving the optimism of some analysts is the sense that Beijing’s immense stimulus plan may be starting to work its intended magic.

Qu Hongbin, an economist for HSBC, said that the November stimulus package had begun to take effect sooner than many had expected and that economic growth would be lifted back above the critical 8 per cent mark in the second half of this year.

The package, which involved expansive promises of infrastructure projects, cuts in export taxes and ordering the banks to open the lending taps wide, has already had a dramatic effect on Shanghai-listed stocks.

The index has soared to an eight-month high, although that may now have triggered alarms in Beijing, where there are rising fears that the flood of liquidity may have side-effects. Analysts said yesterday that the cascade of state money could itself produce asset bubbles and other risks. Wang Tao, of UBS, said that careful policy steps were needed to reduce the risk of “massive resource misallocation, asset bubbles and damage to the banking system”.

China’s banks, it was revealed this week, lent more between January and March than they did in all of 2007. Spending on real estate development was also on the rise in the first quarter, growing by 4.1 per cent and up substantially from the 1 per cent gain logged between January and February.

Others said yesterday that the signs of recovery were only tentative, and that significant risks remain as the global economy struggles to right itself.

Although China is in much better shape than many other countries – particularly in Asia – the rapid fall in its growth rates provided more bearish observers with evidence of the nation’s vulnerability to the global economy and to the spending slump by American and European consumers.

One closely watched gauge of the Chinese economy, given many analysts’ scepticism over the accuracy of official statistics, is power consumption; the numbers cannot be manipulated as easily as official data and power consumption closely tracks the true pace of industrial activity. In the first ten days of April, Chinese media said yesterday, the decline in electricity consumption accelerated – a possible sign that deeper cuts in industrial production and further factory closures may be around the corner.

On a national level, power running through the grids was down 3.57 per cent compared with the same period a year earlier, a considerably larger drop than the average 2.0 per cent decline throughout March.

Some analysts use power data as an early indicator of economic activity, and have cautioned against viewing the improvement in the employment picture in March as a sign that demand has started to recover.