Data confirms hopes and fears about economy
On Friday, the National Bureau of Statistics released economic numbers for last month. Most analysts were pleased with the results, and the stock market surged on the news, but in fact the data has managed to confirm both the hopes of the optimists and the fears of the pessimists.
Manufacturing output rose a higher than expected 12.3 per cent. Net new lending for the month was 410 billion yuan (HK$465.31 billion), less than half the average this year but more than the rumours of 300 billion yuan that had panicked the market last week. Exports declined 23.4 per cent and imports fell 17 per cent, both substantially worse than expected, leaving the trade surplus at a still hefty US$15.7 billion.
For the optimists, the economic numbers, with the exception of the trade data, were all positive and suggested the mainland was on track to recovery. For them, the great risk to China was that the global contraction in demand would result in terrible damage to the country's export industry and would cause factory closings and soaring unemployment.
The main purpose of the stimulus package, in that view, was to forestall an economic contraction and with it the possibility that the economy would fall into an ugly process in which rising unemployment would cause a contraction in mainland consumption, which, when added to the contraction in foreign demand for Chinese exports, would push the economy into a tailspin.
In that sense, the stimulus has proven to be a great success. Mainland growth has slowed, but by a lot less than expected, and unemployment seems to be manageable.
For pessimists, however, the global contraction underscored Chinese vulnerability to out-of-control US consumption, and the need to develop a more balanced approach in which mainland consumers took a larger share of the country's production. This vulnerability existed because China was overly reliant on investment for its growth.
With much of this investment being of low quality and with very low or even negative expected returns, the only way it could be viable was by effectively 'taxing' mainland households to subsidise state-owned enterprises and large manufacturers. This tax came mainly in the form of low wage growth and extremely low deposit rates on household savings.
For this reason, they hoped that Chinese growth would become more reliant on rising consumption rather than on rising investment, much of which is certain to be unprofitable.
The August data suggests that China is growing but that it is actually more reliant, not less, on investment.
What is worse, the very poor import numbers suggest that despite high retail growth figures - a number that most analysts consider to be a very problematic proxy for mainland consumption - consumption growth in China is still sluggish.
For the pessimists, the August numbers confirm that the stimulus package may be boosting production solely because of government- financed (and bank-financed, which amounts to the same thing) investment, and that a serious misallocation problem will result in more future pressure on mainland households to foot the bill.
So who is right, the optimists or the pessimists? In fact, both are right.
If the purpose of the stimulus package was to protect China from the immediate employment impact of the global contraction in demand, it has been an almost unqualified success.
But if at least part of the goal was to help the country shift its unbalanced growth model to one less reliant on foreign, and especially American, consumers, it is not clear that any progress has been made. In fact, to the extent that a significant share of new investment has been wasted, it may actually make future imbalances worse.
China's response to the global crisis needs to be seen as a two-part process. The first part is to boost economic growth in response to the rapid deterioration in the external environment. The second is to rebalance the economy away from its excess reliance on investment and foreign demand. The data seems to confirm that China is successfully managing the first part. Whether it has made any progress on the second part is still very much open to question.
Michael Pettis is a professor of finance at the Guanghua School of Management at Peking University and senior associate at the Carnegie Endowment for International Peace
Reliant on investment
Despite strong retail figures, consumption growth is sluggish
Imports dropped last month by a substantially worse than expected: 17%