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Tuesday, April 14, 2009

China’s stimulus package is hitting home

BEIJING, April 14  –  Wall Street Journal

China’s $585 billion government stimulus programme appears to be kicking in, new data suggest, raising the chances that the world’s third-largest economy may be turning a corner.

Chinese demand for raw materials, hard hit in past months, is showing signs of recovery. Crude-oil imports hit a one-year high in March, the government reported Friday. Steel mills in March imported record quantities of their key raw material, iron ore, in anticipation of a pickup in demand in coming months.

Banks have extended a stunning 4.58 trillion yuan, or about $670 billion, of new loans in the first three months of the year, according to data published Saturday – nearly as much as the 4.9 trillion yuan issued in all of 2008. And the stock market, which had been battered, is on the rise, with the Shanghai composite stock index gaining 2.8 per cent on Monday, pushing it to a 38 per cent increase for the year to date.

The signs augur well for the global economy. China has been one of the world’s most voracious consumers of raw materials. While its aggressive spending plan reflects the power of its state-dominated economy, there are signs that its thrifty consumers are starting to spend more.

Car sales hit a monthly record in March, according to figures issued Thursday, marking the third consecutive monthly rise. Housing sales in major cities have also picked up, with lower prices attracting buyers.

The optimistic outlook has spread to businesses. The National Bureau of Statistics said last week that its survey of managers’ confidence rose in the first quarter after plunging in the final quarter of 2008.

Overall, it appears that the state’s push has helped keep China from slipping into a downward spiral in which poor economic conditions and declining confidence feed off each other. The size of China’s stimulus, announced in November, gets some credit for that: Along with the US plan, it is one of the largest in the world. But the vestiges of China’s command economy have also proved useful.

“China is unusual in that it has this incredible capacity to mobilise all its institutions,” said Vikram Nehru, the World Bank’s chief economist for Asia. The government’s ability to direct bank lending and investment spending has meant its stimulus efforts have worked faster than many initially expected.

“There is now a growing degree of confidence that the stimulus package is having an impact,” he added.

Beijing’s programme still has considerable work to do, with new data also charting continued contraction in the country’s export sector. The global slump in demand has battered exporters, leading to millions of lost jobs.

Exports fell 17.1 per cent in March from a year earlier, after a 25.7 per cent decline in February, official data showed Friday, a reflection of China’s vulnerability to weak economies in the US and other export markets. That left a trade surplus of $18.56 billion for the month, far higher than February’s figure but less than half the levels recorded late last year.

That is also being reflected in slower accumulation of foreign exchange reserves. New data from the central bank, released Saturday, showed the dollar value of reserves fell in January and February before picking up in March. They ended the quarter at $1.9537 trillion, compared with $1.946 trillion at the end of December.

Analysts say swings in the currency market also affected the headline figure for the reserves, which are held in multiple currencies but reported in US dollars.

But the government is pushing cash through the economy, and the state investment programme is driving new infrastructure projects.

Funds budgeted for investments that started in the first two months of 2009 surged 88 per cent from a year earlier.

While improvement in China alone isn’t enough to reverse the global economic decline, it is still welcome news, given that China is one of the few major nations that is expanding.

Like China, the US government also has launched a significant fiscal stimulus, of $787 billion, the impact of which is only now beginning to show up in the economy as tax cuts swell worker paychecks.

US consumers – their retirement accounts and home values depressed – are showing a reluctance to spend as readily as they usually do. Car sales in the US, in contrast to the records being set in China, are extremely low. Spending on infrastructure is taking awhile to kick in, despite talk of “shovel-ready projects.”

Weaknesses in US banks and, even more, the near-paralysis of the important market for securitised credit, remain major impediments to renewed economic growth.

China needs support from demand in the rest of the world to sustain a recovery. Without that, it is still unclear whether China’s economic engine, having been jump-started by government investment, can keep running in a higher gear.

Export manufacturing remains the primary employer of China’s 140 million rural migrant workers. About 20 million of them are unemployed, and if the export crunch continues for several more months, that could exhaust their meagre savings.

Key to the effectiveness of China’s stimulus plan so far has been a race by local governments to spend the money.

After November’s stimulus programme gave them the go-ahead, authorities in the northern city of Harbin started expanding their port in March. The provincial government is trying to launch even more ambitious port works by October.

“Thanks to the stimulus plan, our proposed projects get a lot of support from the central government,” one official in Harbin said.

In central China, state-owned Henan Coal & Chemical Industry Group started work on 15 expansion projects on April 1, declaring its planned spending of 22.4 billion yuan a response to the government’s call to maintain 8 per cent growth this year.

That kind of reaction is partly why many analysts expect first-quarter economic data – to be released this week – to show activity picking up relative to the fourth quarter of 2008, even if headline growth rates remain very low by Chinese standards. The World Bank expects China’s economy to expand 6.5 per cent this year.

“I think it’s fair to say the economy has bottomed. But bottoming is not recovery,” said Ben Simpfendorfer, an economist at Royal Bank of Scotland.

Among the reasons for economists’ caution before calling a recovery is that China has had at least one false dawn in recent months. In early anticipation of stimulus-related orders, domestic steelmakers started ramping up production in December and January, helping to push up prices and freight rates.

But the anticipated demand didn’t materialise, and steel prices have been mostly falling since February.

The stimulus gets credit, at least, for stemming panic. Peter Li, chief financial officer of HLS Systems International Inc., a Beijing-based maker of industrial automation products, says he is getting orders from railroad projects as part of the stimulus plan.

“People are not in as much of a rush to sell inventory. They don’t expect prices to go down,” Li said. “The biggest impact of the stimulus plan so far is really on the psychological level.” 

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