05/04/2009, 00.00
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China’s economy picking up steam but signs are contradictory

Purchases in manufacturing are up for the first time since July, but exports remain low. Job creation is stagnating. Experts believe improvements are temporary, due to the government’s stimulus package. Structural reforms are needed.
Beijing (AsiaNews/Agencies) – China’s economy is picking up steam. For the first time since July last year the Purchasing Managers' Index (PMI), which provides a snapshot of manufacturing conditions, has reached 50.1 in April up from 44.8 in March. A PMI index over 50 indicates that manufacturing is expanding

Economists were particularly impressed by the breadth of the improvement, which they said showed the impact of the government's 4 trillion yuan stimulus plan as well as record new lending by banks.

The State Information Centre said annual gross domestic product growth could accelerate to 7 per cent in the second quarter of this year; others warn that uncertainties can still scuttle things.

Zhang Yutai, head of the cabinet's Development Research Centre, said that the current economic performance was “better than expected” but that it was too early to say that mainland's economy had bottomed out, citing weak activity in the private sector, slow growth in residents' incomes, and continuing uncertainty in the global economy

Also the State Information Centre said that record loan growth was not sustainable because it might lead to excess corporate debt. Instead the central bank should implement a policy of preferential interest rates and easier credit for small companies and households who are the hardest pressed.

Exports, another engine of mainland's economic growth, were likely to fall 20.2 per cent in the second quarter.

Others point out that employment levels have not increased. Some 20 million migrants have become unemployed.

President Hu Jintao and Premier Wen Jiabao urged students to go to the countryside to work as teachers for example to bring innovation and improvements to infrastructures.

Well-known economist Andy Xie wrote in the South China Morning Post that in the four months between December 2008 and March 2009, bank loans rose by 5.4 trillion yuan (US$ 700 billion), or 18 per cent, but much of it was not invested. Enterprise deposits rose instead by 2.3 trillion yuan during the same period because the borrowing cost in some cases was lower than the deposit interest rate

Although investments did grow as a consequence of the government’s 4 trillion yuan stimulus package, releasing liquidity to stabilise the economy remains a short-term solution.

China's invest-and-export model has also reached a turning point. Its spectacular export growth in the past five years has been partly due to the global bubble. As the bubble deflates, China's exports are normalising.

More importantly China's base is simply too big, relative to the world, to grow rapidly in the future. This suggests that, unless a new growth model is found soon, China may experience low growth for years to come.

Indeed China’s economy has to undergo structural changes. The government should aim at lowering property prices and distribute shares in listed state-owned enterprises to the household sector.

China’s economy is also closely tied to that of the United States because of trade but also because much of China’s foreign currency reserves are invested in US government bonds.

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