In the past few weeks, certain figures have fueled optimism among businesses and some analysts that China’s economy has begun to turn the corner and is on the road to recovery. Because China soaks up such a large volume of imports from Asia, and because it is an important regional investor, an early recovery would have positive implications for Asia, analysts note. And because so many Western and Asian companies are deeply entrenched in China and derive a growing percentage of their sales and income from the country, a recovery would also have positive ramifications for the global economy as well.
None of the recent economic numbers in China are shockingly good, but in many cases they either exceeded expectations, or are better than in the preceding months. And that, combined with the experiences of on-the-ground businesses in China, indicates a possible turning point, some experts say.
“We have raised our 2009 GDP (gross domestic product) growth projection to 7.2% from 6.7%, to account for the stronger-than-expected first quarter data, and we also raised our forecast for 2010 growth to 9.0% from 8.5%,” says Wensheng Peng, head of China research at Barclays Capital in Hong Kong. Year-end growth may even be higher, he adds. “We judge that the balance of risks to our projection tilt towards the upside.”
While January and February remained generally weak, March data showed signs of growth, fueling talk of “green shoots” and a “V-shaped” recovery. Year-end GDP predictions vary considerably: Beijing has set a target of 8% for 2009, while Peng predicts 7.2%, the World Bank 6.5%, and the Asian Development Bank 7.0%.
In the first quarter, China’s GDP expanded 6.1% year-on-year, according to the National Bureau of Statistics (NBS). That was 0.7% lower than the 6.8% growth in the fourth quarter, and 4.5% less than the first quarter of 2008. The economy grew 9% in 2008.
But recent data indicate that the economy strengthened in March. One of the key numbers, according to Peng, is the 28.6% year-on-year rise in fixed-asset investment in March, up from 26.5% in January and February, and from 23% in the fourth quarter. Industrial production growth also reached 8.3% in March year-on-year, up strongly from 3.8% in January and February. “The improvement in production seems to have been led by government-related investment as part of the stimulus package,” he says.
Certain other figures for March are also mildly encouraging: The consumer price index (CPI) of inflation is remarkably low, falling 1.2% year-on-year in March to just 1.3%, which gives Beijing great leeway to cut interest rates again if it wishes to further stimulate the economy using monetary policy. Bank lending is also robust, following a government move in late 2008 to raise limits on lending. Bank lending reached US$277 billion in March, setting a single-month record, and US$673 billion in the first quarter of the year. This monetary expansion policy raises the risk of bad loans, but the government has decided that the risk is secondary to stimulating the economy.
Exports fell 17.1% in March compared with the previous March, but even that figure was an improvement from the 21.6% fall in January and February combined. Imports fell 25% in March – again, an improvement compared with the 33.6% decline in January and February. “Imports are likely to be supported by the fast-growing government investment projects, and we [predict] a further narrowing of the decline in the months ahead,” Peng notes.
Other indicators, including total residential property sales and retail sales, are also showing signs of improvement. “Retail sales have been holding up well in general,” writes Paul French, manager of Access Asia, a Shanghai-based market research company that specializes in retail analysis. According to Access Asia, several factors are supporting retail: the fact that few Chinese consumers are burdened by debt, the limited number of white-collar lay-offs in China, and in particular, the solid income growth in China during the past decade. Retail sales rose 14.7% in March.
The view that the retail sector is solid is supported by the experiences of observers who are based in China: In Shanghai, certainly, and in other locations across the country, including in distant provinces, there seems to be no visible slackening of retail appetite, as nightclubs, restaurants and shopping malls look to be every bit as full as they were prior to the downturn that began in October 2008.
Residential property sales volume is also growing, although prices are still either flat or falling slightly in many markets. “According to local government data on residential property sales in March, and based on growth rates of average daily sales in square meters, things are looking up,” writes French. According to Access Asia, sales volume in Beijing grew 55% in March compared with February, and 66% compared with March 2008, while Shanghai grew 76% in March, and 27% year-on-year. Shenzhen, Chengdu, Chongqing, Wuhan and many other cities showed similar growth. “This is all good news going into the second half of the year,” French notes.
Encouraging numbers aside, the economy is still sputtering compared with its previous double-digit annual GDP growth, with the drop in exports a particular concern. But the recent gains are nonetheless encouraging, especially with domestic consumption and investment playing increasingly important roles in the economy. “Consumption is about half the economy, about 50% of GDP, investment is slightly over 40%, and net exports — exports minus imports — is close to 10%,” Peng says. “Exports have declined quite sharply, and therefore the importance of domestic consumption has increased, and our view is that 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.”
Stimulus Provides a Boost
Beijing’s US$586 billion stimulus package, much of which is being poured into infrastructure, has drawn praise from both analysts and the business community. Analysts admire its size and timeliness, while businesses, who rely increasingly on China’s improving infrastructure to ship and distribute their products, like its emphasis on railroads, highways, seaports, airports and other building projects.
“The government’s response was very good, impressively quick and with very large resources compared to the … response from some other countries,” says Yolanda Fernandez Lommen, chief of macroeconomics and economic policies for the Asian Development Bank in Beijing. “It is a rescue package with a clear purpose: to control the fall in GDP and contain unemployment.”
Unlike in many Western countries, where bureaucratic hang-ups and a lack of ‘shovel-ready’ projects delayed the injection of fiscal stimulus, Beijing was able to begin spending right away, because there are fewer delays in a single-party government, and because a massive infrastructure buildup was already underway. China also has relatively healthy banks, so there was little discussion of bailing out insolvent banks and little time wasted on helping them.
The stimulus package has also won praise from the private sector. “I think the Chinese government is one of the few governments that has made clever moves in response to the financial crisis,” says Frank Christiaens, managing director in China for Barco, a designer, manufacturer and marketer of high-tech display monitors that are used in many industries. “We don’t see bailing out investment banks as a solution to solving the financial crisis, and the Chinese government decided to invest more in infrastructure and developing the country, and that has a long-term effect. We consider that money wisely spent, and it helps our business, too, because if infrastructure spending goes up, it helps our business because we supply some of those components.”
The Importance of China
Any recovery in China would be warmly welcomed by the rest of Asia, because of the growing importance of China to the region. “China has passed Japan as an importer, and Japan is overshadowed in the region now by China,” says Lommen. “China has a large role to play in Asia.”
China is now the number-one trading partner in terms of total trade for a number of Asian countries, including Japan, Korea, Taiwan and Hong Kong. “China’s share of Korea’s total trade is now over 20%, and its share of Japan’s total trade is also around 20%,” explains Peng. “In Asean (the 10-member Association of Southeast Asian States) economies, the share of trade with China is 11% to 12% of total Asean trade, so China is not the largest partner, but it is still very significant.”
China is also an important investment partner. “Japan, Korea, Taiwan and Hong Kong all have a lot of direct investment in China, so if the Chinese economy performs well, their earnings from those investments benefit,” he says. “Also, China has started to increase its direct investment abroad, particularly in southeast Asia. The investment flow is mainly from northeast Asia into China, and from China to Asean economies – that’s the big picture. So China’s importance to the rest of Asia is not only in trade, as the number-one or number-two trading partner, but also in investment.”
A recovery in China is also important for the foreign businesses operating in China, export-oriented though many of them are. While most of their problems are external – currency fluctuations, lack of bank credit for themselves and their customers, and soft export markets – they are also counting on China for an increasing volume of sales.
For example, Fagerhult, a manufacturer of lighting for businesses, offices, retail areas and outdoor venues, sells about 15% to 20% of its output in China. Like many others who are active in China, Mats Johansson, the company’s executive director for Asia Pacific, is positive about recent developments. “Other than the exchange rate, I would say that the climate here in China is getting better….” says Johansson. “The logistics and all this infrastructure [development] have been positive for us because the freight costs have gone down.”
Similarly, Barco’s Christiaens is optimistic about developments in China. “At the moment, [despite] the financial crisis, we see signs that the Chinese market is picking up again,” he says. The U.S. is the largest market for Barco products, while China is number two. “This is a development of the last seven years,” says Christiaens. “Seven years ago, China was less than 2% of our worldwide revenue, and it is now more than 10% and it is still growing.”
Aside from sales, the health of China’s economy is critical to export-oriented manufacturers because of the supply chain issue: A dramatic slowdown in China would cause many local suppliers to go bankrupt, disrupting the delicate web of component supply that fuels their businesses. “We have about 50 suppliers that we deal with on a daily basis, and we worry about their financial situation,” says Johansson. “It would affect us a lot if they went bankrupt.”
Businesses in China are not standing by, waiting for the recovery to pick up speed; instead, they are taking steps to insulate themselves from further shocks and future downturns. Fagerhult, for instance, does not automatically buy components from the cheapest suppliers in China, for fear that those suppliers may go out of business during a downturn. “The lesson we have learned is that we don’t go for the lowest priced-supplier,” says Johansson. “We not only look at the price, but also at the financial situation of those companies, how they can handle a more competitive and difficult climate.”
Barco is responding to the global slowdown by reducing its reliance on bank credit, among other measures. “One of the problems is that a lot of these nationalized banks want to favor their home country’s corporations, so for most companies there has been a reshuffling of who you do your financing with,” says Christiaens. “The other thing is that the banks have suddenly become much more reluctant to give anybody credit, so we have had a major drive since October and November last year to reduce inventories and accounts receivable, to reduce our working capital needs. We are aiming to become independent from the financial world, because to be very honest, the financial world at the moment is not really an ally when you do business. We want to be as independent as possible from these troubled banks.”
But not everyone thinks that the curve is going up so definitively. On April 7, during a press conference in Beijing hosted by the World Bank, Louis Kuijs, senior economist at the World Bank, said, “I personally think it’s too early to start to see a sustained, rapid recovery in China simply because the global picture is very subdued…. China’s economy is very much linked to the global economy. We are likely to see more negative developments in the wor