For China, Domestic Consumption Will Likely Be the New Growth Engine, at Least for Now
China's report today that exports fell nearly 23% in April is the latest indicator that the country is generating more of its economic growth domestically and relying less on overseas sales, recent reports suggest. This shift results in part from the weak world economy, which needs fewer Chinese products, but also from policies aimed at raising domestic consumption to offset that lower overseas demand, most notably the $586 billion stimulus measure.
Some results of this shift are starting to turn up in the statistics. “China’s growth is increasingly self-generating and continentally driven,” notes the Financial Times in a story published May 11. Not only have China’s retail sales held up much better than in most large economies, but the strongest results come from “inland and lower-tier cities, rather than from the traditional growth powerhouses clustered around the Yangtze and Pearl River deltas,” the FT notes.
China Knowledge at Wharton reported similar trends in its April 29 edition in "The Road to Recovery? Some Positive Signs Emerge for China's Economy" which noted comments by Wensheng Peng, head of research for Barclays Capital in Hong Kong. He thinks domestic consumption will rise more than enough to offset the fall in exports. “Domestic demand, particularly government-led investments, will be the main source of economic growth this year, while exports are likely to remain weak for the remainder of the year.” On balance, Barclays Capital has raised its 2009 GDP growth projection to 7.2%, up from 6.7%, based on stronger-than-expected first-quarter data, says Wensheng.
Still, the picture remains mixed. Yves Smith, in her blog, naked capitalism, notes that power use is a good gauge of economic activity. “And while many have pointed to loan growth as an indicator that China is making a recovery, energy consumption has yet to confirm it,” Smith wrote. She went on to note this report from ChinaStakes, which points out that China’s power generation dropped once again in April, “indicating that the macroeconomic rebound the market has expected is yet to appear.” China’s latest reports show that national power generation fell 3.55% this April compared with last April and was 3% below March. For the first quarter, power generation fell 4%.
And while exports appeared to rebound somewhat in March – they were down from year-earlier results by just 17.5% after plummeting by 26.5% in both January and February – the latest numbers out today show that exports continued to tumble in April by 22.6% compared with April of 2008.
Meanwhile, those who saw a ray of hope in the positive level of loan growth in China may have to think again. The latest FT report notes that lending by Chinese banks “slowed dramatically” in April on worries that first quarter loan growth had been excessive and could lead to “possibly creating a new round of asset bubbles.” The FT also reported that officials were concerned that stimulus money was illegally being put into the stock market and that “state-sponsored stimulus projects of dubious commercial value could become non-performing assets.”
The China Knowledge at Wharton article also offered some caution regarding the recent optimism about the world's fastest-growing economy. It pointed to a recent report from Standard Chartered Bank, which noted the recent positive indicators do not “represent an immediate recovery or rebound. We think China's economy will see a U-shaped recovery, and the real economy will run at the bottom for quite some time, without further deterioration or a conspicuous rebound … Industries like transportation and equipment manufacturing are the main beneficiaries of government investment, whereas SMEs (small- and medium-sized enterprises) are on a footing that is still quite worrisome.”