Can China Sustain 8% Growth?

While the Chinese economy expanded 8.9% in Q3, propped up by easy credit & continued government spending programmes, Europe, US & Japan continue to flounder. The world’s 3rd largest economy has recorded 7.7% overall growth in the first 9 months of 2009, with officials saying they are confident that the much talked about annual growth target of 8% will be achieved.

Last November, as it became clear that the global economy was heading into a recessionary period, central government implemented a 4 Trillion yuan/$586 Bn stimulus package, aimed at cushioning the blow of decreasing exports on the economy whilst also improving industrial efficiency at all levels. Via this stimulus package, China has implemented a number of schemes that impact practically all sectors in the economy; real estate/construction, transportation infrastructure, agriculture, social services, industry, earthquake reconstruction, technology advancement and rural development being amongst those receiving special focus.

The strategy has paid off, with growth rising to 7.9% in Q2 from 6.1% in Q1 2009. Figures show that industrial output has risen 8.7% in the first three quarters of the year, and 12.4% in July-September, which would seem to signal accelerated demand from domestic purchasers, keen to take advantage of low cost loans to invest in the expected turnaround for China in 2010.

However, while surging purchases of coal, iron ore and other raw materials have helped mining majors such as Vale (VALE) and BHP Billiton (BHP), the impact of China’s comeback has mainly been one of improving global sentiment than of actually driving growth, according to Stephen Green, economist for Standard Chartered Bank in Shanghai.

“Exports remain the key weakness for the Chinese economy,” Moody’s Economy.com economist Alaistair Chan said in a report yesterday.

Our view is that it is time for those investing in China to pay attention to people like Chan, as investment via the stimulus package has accounted for nearly 88% of GDP growth this year. Central government investment in factories, construction & national infrastructure has risen by one third in the first three quarters of this year to a record 15.5 trillion yuan (US$2.27 trillion).

As the economy “flourishes”, this heavy reliance on public works and other investments could be masking long term issues for the Chinese economy. Impressive as China’s ability to ride out the storm has been, companies desperately need to restart exports to offset the economies dependance on fiscal hand outs.

This week China’s leaders have also signalled concern over these obvious imbalances in the economy, with the State Council saying policy must shift to dealing with waste and other associated problems of high growth.

“In the first three quarters, the pace of economic growth quickened,” the State Council said “At the same time, we also are clearly aware that there are still difficulties and problems in the economic and social development of our country.”

So it looks as though there are a number of challenges ahead for China in the near future. The stimulus package has obviously been deployed in a much more effective manner than in Europe and the US, however China has not had the crippling effects of massive credit & huge write downs in its nascent financial sector. Although the Chinese have made a number of efforts to open new markets through bilateral trade agreements and an accelerated FTA programme with neighbouring countries in Asia and its BRIC partners, it cannot fully offset the real factor of dependancy on Western markets indefinitely.

Disclosure: No current holdings

Comments

[chap08:]

Can China Sustain 8% Growth? It depends on how much more stimulus the government throws at it. They sure as hell won't get 8% from exports.

Perhaps the most telling thing is that the government doesn't think the country can sustain growth of LESS than 8% without social unrest. There's plenty of money, domestically and internationally, to fund further investment.

Oct 23 10:06 AM

[huangthomas:]

It is a national policy to grow economy at least 8% through thin and thick to lift the rural population out of poverty. The national budget always provides funds for 8% growth. Therefore, the answer is definitely YES. When the current world financial crisis is over, China will go back to double digit growth which they have enjoyed for the last decade or two.

Oct 23 10:30 AM

[tobi:]

8 % growth is a hoax, I wonder why people trust a communist regime so blindly.

Oct 23 10:41 AM

[Tom B:]

Through 3 years: probably.
Through 5 years: conceivably
Through 10 years: bubble bursts-- just like "dot-coms"; Japan in the 1980's; Banks in the "2000's"".

Think about it: 1) Do you trust their accountants? 2) Do you trust their poison/contaminated/da... products? 3) Does planet Earth have the resources to lift another billion plus people to a US standard of living? 4) Do you think the people will tolerate the Govt's continued genocide forever? 5) Do you think the US will buy into the poisonous concept of "free trade", without any checks and balances, forever? 6) What about Latin America--closer; better trained workers. What about India? Better trained workers; everyone speaks English already; FUNCTIONAL democratic Government.

Oct 23 10:47 AM

[Tony Petroski:]

A good article by Mr. Harper.

I have a contact in the communist government who tells me that Chinese growth was actually 8.953%, not the 8.9% in reported in the press.

Oct 23 10:49 AM

[rlirph:]

1) I do not trust accountants in China any more of our Big 4.
2) Your question is moot. If you genuinely think the Chinese products are tainted go back to your house and throw those poisonous products away. See how empty your house is!
3) No. Planet earth does not have resources to supply another billion people to a US standard of living. It just mean there are some of us will have a lower standard of living.
4) Chinese government's genocide is no greater than the European
killing off our native Americans.
5) Yes. I think we Americans are stupid and short sighted enough that we believe in free trade while running billions of trade deficits years after years. Our twin deficit(fiscal/trade) started when I was in college. Now I am near retirement.
6) Countries in Latin America could have come up years before China can but did not. Wonder why? There is no comparison between China and India. By the way have you ever visited China or India. When you have we can talk.

Finally stop bashing China for our problems. That is irresponsible! Next thing you can going to blame the banks for all the credit cards you run up!

- A US Expat Living In GZ


On Oct 23 10:47 AM Tom B wrote:

> Through 3 years: probably.
> Through 5 years: conceivably
> Through 10 years: bubble bursts-- just like "dot-coms"; Japan in
> the 1980's; Banks in the "2000's"".
>
> Think about it: 1) Do you trust their accountants? 2) Do you trust
> their poison/contaminated/da... products? 3) Does planet Earth have
> the resources to lift another billion plus people to a US standard
> of living? 4) Do you think the people will tolerate the Govt's continued
> genocide forever? 5) Do you think the US will buy into the poisonous
> concept of "free trade", without any checks and balances, forever?
> 6) What about Latin America--closer; better trained workers. What
> about India? Better trained workers; everyone speaks English already;
> FUNCTIONAL democratic Government.

Oct 23 11:18 AM

[Dave Wrixon:]

Absolutely right, it cannot be sustained indefinitely purely on Government Stimulus but it could easily do 5 years without recovery in the rest of the World and China's consumers are no less capable of sustaining an economy than anyone else's if they are lent enough money. Over the next year or two their will be a wall of money heading for capital investment in China. The trick as ever is to ensure that a substantial proportion of it finds its way into wealth generating industry. This is an area where the US has failed utterly in recent years, and China has excelled beyond all expectation. Will it continue to be so successful over the long-term. No, it is very unlikely that rate of closure with Western Economies can be sustained at current levels for more than another 5 or ten years because by then their really won't be much of gap left to close.


On Oct 23 10:47 AM Tom B wrote:

> Through 3 years: probably.
> Through 5 years: conceivably
> Through 10 years: bubble bursts-- just like "dot-coms"; Japan in
> the 1980's; Banks in the "2000's"".
>
> Think about it: 1) Do you trust their accountants? 2) Do you trust
> their poison/contaminated/da... products? 3) Does planet Earth have
> the resources to lift another billion plus people to a US standard
> of living? 4) Do you think the people will tolerate the Govt's continued
> genocide forever? 5) Do you think the US will buy into the poisonous
> concept of "free trade", without any checks and balances, forever?
> 6) What about Latin America--closer; better trained workers. What
> about India? Better trained workers; everyone speaks English already;
> FUNCTIONAL democratic Government.

Oct 23 11:21 AM

[Michael Clark:]

They can sustain 8% growth if the government wants to continue giving away money until they have no more money left. Where is the demand? The demand is for cheap money, not for products and services? When the cheap money stops coming, we'll see if there is any real demand.

Oct 23 11:41 AM

[notsosmart:]

you can hardly believe our gov nenermind a communist dictatoship.those are phony #s as phony as our AAA rated paper.

Oct 23 11:59 AM

[Terry Rowe:]

Who owes whom almost $1,000,000,000,000.00 ??


On Oct 23 10:47 AM Tom B wrote:

> Through 3 years: probably.
> Through 5 years: conceivably
> Through 10 years: bubble bursts-- just like "dot-coms"; Japan in
> the 1980's; Banks in the "2000's"".
>
> Think about it: 1) Do you trust their accountants? 2) Do you trust
> their poison/contaminated/da... products? 3) Does planet Earth have
> the resources to lift another billion plus people to a US standard
> of living? 4) Do you think the people will tolerate the Govt's continued
> genocide forever? 5) Do you think the US will buy into the poisonous
> concept of "free trade", without any checks and balances, forever?
> 6) What about Latin America--closer; better trained workers. What
> about India? Better trained workers; everyone speaks English already;
> FUNCTIONAL democratic Government.

Oct 24 06:01 AM

[Freya:]

Boy, I wish our Government could keep spending like crazy but keep increasing its Foreign dollar reserves at the same time.

Expect their GDP to go above 9%.

Oct 24 11:13 AM

[ArtfulDodger:]

I think the time to start exiting Chinese investments will be when the Chinese start to change either fiscal or monetary policies.

Right now their policies are business favorable. If and when they change (or announce such) grab your running shoes.

Oct 24 11:53 AM

[EMC in Shan...:]

Having lived in Shanghai for 15years, I can appreciate that the Chinese Gov has been trying to maintain the delicate balance.
It needs growth that generate enough job for its seven millions or so graduates each. At the same time it is trying to keep inflation at a relatively low level so its poorer citizens does not suffer. If US has 1.3Billions population that you will appreciate the difficulty in governing China.

So far, I think they have done a good job and made good decision at critical times in the past including the recent stimulus package and the areas it was targetted.

One thing note mentioning is that the Gov has spent huge sum of money to improve healthcare and enforce regulation that required house builder to build low cost house for the lower income group.
It hopes this measures will improve its citizens' sense of security and encourage them to spend more. The gov is hoping that domestic consumption will be the engine for growth going forward replacing export.

I think if all chineses start to spend more it will help other countries as well.

Oct 24 06:56 PM

[Paul Harper:]

maybe a little rhetorical, but my main point is that they have spent $2.3T this year on infrastructure etc, as outlined in my post.
It is not a matter of are the Chineses willing to continue, but can they.

Oct 25 02:58 AM

[Paul Harper:]

based upon what exactly, you have a magic metric 8 ball on your desk ?

On Oct 24 11:13 AM Freya wrote:

> Expect their GDP to go above 9%.

Oct 25 02:59 AM

[Paul Harper:]

Dodger,
I agree with you to a certain extent & what I have in Chinese stocks (ADRs) will stay there, until there is a change in monetary policy.
However, any new positions I initiate international stocks will be in Latin-America, predominantly Brazil & Argentina.


On Oct 24 11:53 AM ArtfulDodger wrote:

> I think the time to start exiting Chinese investments will be when
> the Chinese start to change either fiscal or monetary policies.<br/>
>
> Right now their policies are business favorable. If and when they
> change (or announce such) grab your running shoes.

Oct 25 03:02 AM

[Andeli:]

What we are guessing on here is what will the return on fixed assets in China be in the future?

The trial and error approche that has been used so far seems to be working, but 30 years of trial and error could be coming to an end, because the price of error is increasing.

As China has entered into new sophisticated production techniques. The price of error will not just be an empty apartment building or road anymore. It will be pricey medical test, wasted research funds, unutilised and uncapitalized research results. The price of a high tech research error is way higher then that of a low tech fixed asset laying idle.

China no longer has the U.S or E.U consumers to help give return on chinese fixed asses. Even if low tech exports picks up again it is unlikely that anyone will consume at the same rate as before, the trade tensions will also make it hard on low tech export and there are a many new competitors raising other places in South East Asia, In India and in the Middle East waiting to have a go at low cost production.

This meansChina has to succeed in part with its latest tech program from 2006 in order to have a chance of getting the export going again, but doing high tech medical or technical is different from building a road or an apartment complex, so maybe 8 % is a little over the top.

The chinese consumer and the chinese stat will carry growth a long way, but they can not replace the worlds two largest economies, so China has to invent new products for the U.S and the E.U and it has to do so on it own for the first time as it enters area where other have not been before.

So instead of looking at all the roads, railways and buildings in China maybe one should look at the strengthening of the national chinese innovation system as it has bring in a fair share of future GDP growth. What did the national innovation system get out of this years investments. The Chinese state has to start inventing and if they succeed, this will the the century of state driven innovation.

Oct 25 07:56 AM

[Tony Daltorio:]

It read like this article was written 10 years ago. The so-called dependence on exports to western markets only comes into play with the export-driven eastern coastal cities of China.

The rest of the country is booming and could care less about the US. Wake up - there is a lot more to China than just a few cities!

Oct 25 09:48 AM

[Paul Harper:]

nice to see my mystery stalker is back in action ... dude grow a pair, get a girlfriend, watch a movie

Oct 26 02:38 AM

[Paul Harper:]

lolz ....

Oct 26 09:40 AM