Is China's Economy Heading For A Crash?

by: Shaun Rein

This column originally appeared on BBC.

Electric power generation figures are viewed by many analysts as a more reliable proxy for China's economic activity than official growth numbers.

Recent figures have been weak.

Electricity use grew by a paltry 5.2% in May according to the National Energy Administration, leading many to conclude that China is going to have a hard landing.

But the situation is nowhere near as gloomy as some are making it out to be.

The power generation figure is somewhat misleading since it disproportionately reflects the heavy manufacturing sector.

Energy-intensive, high-polluting industries like steel construction have been hit hard by collapsing demand from Europe, creating a significant impact on power consumption. Manufacturing hubs like Guangdong have suffered, but other provinces that are less reliant on manufacturing are continuing to see strong growth.

Not only that, the government is continuing to limit power-intensive industries to encourage growth in more energy-efficient areas, such as higher-end manufacturing.

There will naturally be some friction in the economy during a shift and that is to be expected, not feared.

To be sure, a slowdown is taking place.

However, the economy will grow faster starting at the end of the third quarter as increased liquidity makes its way into through the financial system.

Furthermore, Chinese consumer optimism and purchasing power are still strong. According to my firm's research, locals are still upbeat and willing to spend, with many choosing to spend their money outside of the country because the strong value of the Chinese renminbi allows their money to go farther abroad.

There is also considerable pent-up demand both for autos and for real estate.

But the Chinese government, wary of the overheating risks, have imposed restrictions that have caused consumers to pull back on spending and shift into a wait-and-see mode.

Looking forward, there are some hopeful signs.

For one, it is becoming easier for Chinese businesses and individuals to borrow. Better rates to depositors will encourage consumers to feel that they can save less and spend more.

The labour market also remains tight. Starting salaries for recent graduates are expected to rise 13% in 2012 over last year. Compare that to 2008, when 20 million factory workers lost their jobs.

The next three to six months might be rocky, but many of the most worrying indicators are due to external factors, and the Chinese economy's underlying strengths are being masked as a result.

At the end of the day, I remain optimistic about China's growth prospects in the long-term. But if the eurozone collapses then all bets are off.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.