The World Bank may have boosted its estimate for Chinese economic growth for 2009 to 7.2% from its earlier forecast of 6.5%, but it is hardly the strongest of endorsements of the $US585 billion of stimulus spending the government is throwing at the economy.
In fact a lead economist on China at the bank says simply that it’s too early to say if China will have a sustained recovery. According to the Bank’s update, without a sharp lift in market based investment and a lift in the global economy, especially in 2010, China will struggle to maintain growth.
The update, released late yesterday and contains enough qualifications and cautions to concern countries like Australia, which has put a lot on the China rebound, to also be cautious.
The bank says that it is clear government spending is filling the gap left by the slump in exports and the recession, but it fears that global slump will put a drag on China’s growth, no matter how much the central government invests.
“Government-influenced investment has soared,” the Bank said. “Market-based investment has lagged, although positive signs have emerged in the real estate sector. Consumption has held up well.
“Very weak exports have continued to be the main drag on growth, while import volumes have recovered in the second quarter of 2009 as raw material imports rebounded.”
The bank said the reason why market based investment is likely to continue to lag is “because of a squeeze on margins amidst spare capacity in many manufacturing sectors. Prospects for real estate activity appear reasonably good, but consumption is unlikely to pick up speed.
“In all, the World Bank thinks that China’s growth is unlikely to rebound to very high single digit rates before the world economy recovers convincingly, and projects GDP growth of 7.2 percent in 2009 … the fiscal deficit is on course to be significantly higher than budgeted this year and additional stimulus now would reduce the room for stimulus in 2010.”
So if the stimulus doesn’t work this year and there’s no improvement in market-based investment and demand for exports, the Government will struggle to spend more next year. For Australia’s sake (and the world’s) there has to be a recovery in world economic activity and demand in 2010, and the earlier the better.
That’s why the underperformance of the export sector has greater importance for China’s growth prospects than many commentators think.
As the Government spends to keep the economy stimulated, the weak export performance is actually limiting the impact of that stimulus.
China needs exports to rise (they fell a record 26% in April from April, 2008), and that’s not going to happen with the global economy in a slump.
And that’s why its fascinating that two senior Chinese officials have issued warnings in the past 10 days about the possible under-performance of exports this year.
The latest warning about the export performance came in a story in the official China Daily website and paper, which was later reported on the Xinhua website and newsagency reports.
“Export growth is unlikely to rebound in the short run and it’s difficult to realize the 8% target for foreign trade growth this year,” Li said in an address to a Standing Committee meeting of the National Committee of the Chinese People’s Political Consultative Conference, the nation’s top political advisory body.
“During his two-hour speech, Li briefed the nation’s top political advisors on the latest economic situation, the effect of the stimulus package and the priorities for the government during the rest of the year,” Xinhua and the Daily reported.
“Top policymakers set a target for the nation’s foreign trade to grow 8% earlier this year, the same rate as the nation’s expected GDP growth target. However, the nation’s trade volume for the first five months shrunk by 24.7 percent, compared with the same period a year earlier.
“Li said the fast contraction in foreign demand was posing an “unprecedented” challenge to the nation’s economy, which showed positive signs over the past months.”
Chinese Government officials do not raise negative issues without a purpose and the fact this possibility of undershooting the export goal (and the suggestion the country might miss its 8% growth rate as well) should be seen as a warning that the Government thinks it’s a very real chance of happening.