Cautious analysts play down Chinese claims of recovery from financial crisis

Jane Macartney in Beijing

The Chinese economy rebounded in the second quarter, boosted by a surge in state spending and in bank lending, putting the country on course to lead the world out of the worst global downturn since the Great Depression.

The economy had been expected to show a strong improvement as a 4,000 billion yuan (£365 billion) government stimulus package — introduced to combat a slump in exports — began to take effect after being unveiled in November.

But few expected that annual gross domestic product (GDP) growth would accelerate in the second quarter by 7.9 per cent year-on-year, up from 6.1 per cent in the first quarter.

It made the world’s third-largest economy the best-performing of all leading economies.

The figures look even stronger if calculated on the basis of an annualised quarter-on-quarter comparison, showing the economy may have grown by as much as 17 per cent.

Zhu Jianfang, chief economist of Citic Securities, said: “The data showed the economic recovery is stronger than expected.

“There will be no suspense about achieving the Government’s goal of 8 per cent GDP growth this year.”

The 8 per cent figure is crucial to the ruling Communist Party, which sees it as the minimum level needed to hold down unemployment.

Li Xiaochao, spokesman for the National Bureau of Statistics, said that the impact of the stimulus package had been remarkable.

“Our economy is continuing to turn for the better and there are more and more positive factors. We see more people shopping and prices beginning to rise.

“The economy is recovering and the recovery is intensifying. All the Government’s policies have worked together to help us overcome the financial crisis.”

Retail sales, a rough proxy for the consumption that the Government is striving to encourage, rose 15 per cent in June from a year earlier, after a 15.2 per cent increase in May.

Some economists said the data showed that China had achieved a V-shaped recovery, with a carefully managed shift to nurture stronger domestic demand helping to offset the plunge in exports.

Since 1978 China has averaged GDP growth of close to 10 per cent a year, but the Government has had to ramp up spending and shift to a loose monetary policy to put the country on track for its official target for 2009.

In addition, consumer prices in June fell 1.7 per cent from a year earlier, giving Beijing a freer hand to keep spending without increasing inflationary pressure.

Signs of that freer hand are evident in lending. Banks have issued twice as much in new loans so far this year as they did in the first half of 2008, with the broad M2 money supply soaring to 28.5 per cent in the year to June, blowing past forecasts of a 26 per cent rise.

In a sign that money has been flowing back into the country in anticipation of the success of the stimulus package, the central bank’s foreign exchange reserves leapt by $177.9 billion to $2,130 billion, making China the only country to amass more than $2,000 billion in official reserves.

However, Mr Li warned that problems remained. “The foundation for recovery is still not solid. The recovery is not fully balanced,” he said.

The lopsided nature of the economy was evident in a breakdown of the first-half GDP growth rate of 7.1 per cent.

Investment accounted for 6.2 percentage points of overall growth, showing the emphasis on building roads, railways and other infrastructure in the Government’s stimulus package.

Consumption contributed a positive 3.8 percentage points to GDP, but net exports subtracted 2.9 points — a reflection of the slump in demand for Chinese goods.

Overreliance on the stimulus package could have negative consequences.

Ben Simpfendorfer, China economist for RBS in Hong Kong, said: “The important message here is that while the pace of growth is accelerating, the quality is deteriorating.

“Growth is too reliant on public investment and residential investment. It’s not sustainable.” (Jane Macartney, The Times).


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