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China’s Great Growth Gamble

Business, China, Economics
By John Richardson on 23-Oct-2009


Copperstocks.jpgSource of picture: www.todaysfinancialnews.com

China’s feverishly fast construction of roads, power plants and new industrial capacity has been designed to offset the decline in exports – and what a short-term success the policy has been.

Of the 7.7% of GDP (gross domestic product) growth recorded for the first nine months of this year, 7.3 percentage points was accounted for by investment and ONLY 4 percentage points by consumption growth, according to today’s Lex column.

ONLY is in capitals because this seems at odds with the headline 15.1% increase in retail sales recorded for January-September.

But as we’ve mentioned before (click here on the link for the September archive and go down to the 16th), even the National Bureau of Statistics (NBS) thinks retail sales are a bad proxy for real consumption growth because they take into account wholesale deliveries; in other words stuff that might be sitting in warehouses or on shop shelves unsold.

And what if the government’s assumption that it can tide the economy over until exports bounce back proves to be unfounded?

September exports fell, even though the decline slowed from August. But shipments were still 15% worse than they were in September last year – when Lehman Bros went belly-up.

The size of government stimulus has been enormous – probably set to be more than 15% of 2009 GDP – with bank lending registering big growth in September over August.

This led the State Council to indicate earlier this week that monetary tightening might take place because of concerns over asset bubbles.

This won’t be before at least the Chinese New Year, which takes place in February 2010, according to economists.

Today, though, the NBS – which announced the nine month GDP number and other statistics that have led to lots of reports of a sustained recovery – said that current economic policies will be maintained.

So who is right, the State Council or the NBC?

Should the government be worried about debt-fuelled asset price bubbles?

Could these bubbles get out of hand forcing a withdrawal of stimulus before exports have recovered?

House prices are up by 73% so far this year, according to this article from the New York Times.

“Not even Alan Greenspan managed that,” said my fellow blogger, Paul Hodges – referring to the former Fed chairman’s famously lax monetary policy.

Evidence also continues that commodity stockpiling is still taking place.

“We do not expect the (stockpiling) trend to last. China’s recovery is being driven by investment, but the recent pace of commodity import growth has been much faster than justified by the rise in current demand,” said Mark Williams of Capital Economics in research report earlier this month.

“Inventories of many metals have more than doubled since the start of the year. Copper inventories are up 500%.”

And, according to the latest entry on Michael Pettis’s blog, concerns about stocks that don’t make it into official data are growing as the search for some way of measuring these hidden inventories continues.

Pettis quotes a Wall Street Journal article which says that as much as 900,000 tonnes of unreported copper stocks could have built up in China.

One could argue that the surge in commodity imports indicates strong underlying demand.

But how can this be if imports are down and consumption as a proportion of January-September GDP growth was so low?

And what about all these reports of high inventory levels? 

Further – a front page article in today’s Financial Times points out that growth in nominal terms for the first nine months was 4.7%, meaning deflation was behind the higher headline number.

Falling prices hardly suggest a domestic economy in the midst of a consumer boom.

The bubbles in real-estate, equities and commodity markets such as the Dalian Commodity Exchange – which provides polymer futures contracts – are a separate ossue.

These bubbles are being pumped up by the speculators with access to easy bank lending – different, of course, from the average guy in the street who might have lost his job because his factory has closed down.

September chemical import data is due out any day soon – and we’ll give you the details as soon as we can via our friends at International Trader Publications Inc.

Positive statistics might well be seized on by chemicals traders going long and chemical companies trying to talk-up share prices.

But the numbers will need to be analysed in light of all the above.