The China Conundrum
Yesterday (Thursday), China announced that its economy expanded by 11.9% in the first quarter, compared to the first quarter of 2009. This a very rapid pace indeed, slightly faster than the median expectation of analysts. Yet this item of apparently good news had little or no impact on the financial markets. The Shanghai stock exchange was marginally lower and elsewhere there was no noticeable reaction. Maybe this reflects the fact that the news was not really new, or maybe this kind of ‘blistering’, ‘white-hot’ economic growth is simply business as usual for China.
There is also the possibility that it represents too much of a good thing. Although inflation data in China still show little immediate pressure on prices, it is widely expected that such pressure will be felt soon — and that the response of the Chinese authorities will be to introduce measures aimed at cooling the overheated economy. These measures are inevitable, just a matter of time, we are told – so maybe the market is already looking ahead to that imminent tightening and its impact. Mind you, most of the analysts warning about inflation say that these counter-measures are overdue and should already have been taken; therefore, whenever in the future they are taken, it will be ‘too little, too late’. The Chinese economy is already overheated and if its headlong growth is not slowed soon it will run off the rails.
Earlier in the week, China announced its first monthly trade deficit since 2004. This was caused, so the official announcement explained, by imports rising (even) faster than exports – but there were various one-off and seasonal factors involved, so that virtually no-one expects the deficit to be repeated, let alone become a trend. However, the timing of this deficit was, shall we say, fortuitous. It comes against a political and diplomatic background in which the Americans are increasingly upset about Chinese exchange rate policy. By artificially holding the yuan steady against the dollar, it is claimed, China is keeping its goods artificially cheap and thereby exacerbating the imbalances in the global economy.
The US Treasury was scheduled to issue a report on April 15, which was expected to find the Chinese guilty of currency manipulation. The report has been deferred, probably for several months, apparently on the understanding that China will announce changes to its exchange rate policy – probably beginning a gradual revaluation, of the sort it conducted in 2006-2008, until the global crisis broke. Had the report been published, the tensions in US-China relations would have been severely aggravated and Congress would likely have taken some unilateral action. This way, the Chinese have time to act, seemingly not under US pressure.
Meanwhile, the trade data show the overall Chinese trade surplus as shrinking, especially the surplus versus the US. What is one to make of this? Surely it undermines the case for being angry with China over its exchange rate policy? No, is the insinuation. The data can’t be trusted – no Chinese data can – and this deficit just popped up a trifle too conveniently to be taken at face value.
But if you can’t trust the Chinese data then what is the truth about the Chinese economy? The answer is that the truth is whatever you choose to believe – or perhaps that you have to put your faith in a specific analyst whom you believe knows what he is talking about. Undoubtedly the economy is experiencing very rapid growth, although just how rapid is unclear. But more important than the quantity is the quality: is it all, or mostly, driven by the huge government stimulus plans? Is it still mostly comprised of investment in assets – plant and equipment or office buildings – that are superfluous and hence wasteful? How much weight should be given to anecdotal evidence, such as the huge new office buildings in Beijing and elsewhere that are sitting empty? Is there a property bubble and if there is, will it burst soon – or has it already done so, as some claim? And how reliant is China on foreign demand (ie on exports) which might fade as stimuli in the US and Europe wear off?
The answers to these, as to all other questions about China is faith-based. You either believe someone and accept their views, or you believe no-one entirely and remain sceptical of everything to do with China. You certainly can’t ignore it, because it’s a key player in almost every industry and in the global economy as a whole. But that just makes the problem worse: China is far too important to ignore, or to be ignorant about, but it is extremely difficult to understand what’s going on there, let alone what might happen next.