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Difficult to know how solid the recovery in China is [ClearOnMoney]
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Difficult to know how solid the recovery in China is

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Commentary

Difficult to know how solid the recovery in China is

3 Dec 2009 by Jim Fickett.

Recent statistics suggest China is recovering nicely, but statistics out of China must be treated with considerable caution. An empty city built as a government project serves as an illustration of possibly wasted activity. It will be at least months and perhaps years before we know whether the real economy is back on a path of sustainable growth.

On Tuesday there was positive news out regarding manufacturing in China. The Telegraph reported, in an article entitled "Positive news from China's manufacturing sector pushes yuan higher":

China's official purchasing managers' index (PMI) was unchanged at 55.2, where anything above 50 indicates expansion. It marked the ninth consecutive month of growth in manufacturing activity in China.

Separately, HSBC's manufacturing PMI painted a stronger picture, rising to a record high of 55.7 in November from 55.4 in October. HSBC said that Chinese manufacturers reported stronger external demand, “largely reflecting an improvement in global economic conditions”. The positive news pushed the yuan slightly higher against the dollar to 6.8270. Both surveys showed that cost pressures in the sector grew last month.

Economists at Capital Economics said in a note that the surveys' “message of economic strength tallies with evidence from elsewhere. Our own China Activity Proxy suggests that the recovery is now entrenched across all sectors of the economy, including services.”

China's economy has rebounded stronger and more quickly than expected, and it is hoped that demand there will help to boost other economies and support a wider recovery.

The news is particularly important because, as noted in the last paragraph quoted above, many people are hoping recovery in China will lead recovery elsewhere.

The agreement of different sources in the above quote does increase confidence somewhat, but one must be very cautious with statistics out of China. Following one recent report of high growth in GDP, Foreign Policy reported, in a 3 Sep article entitled "How China cooks its books" that stimulus funds were being included in GDP before they were spent:

local and provincial governmental officials are the ones who actually fiddle with the numbers. They retain considerable autonomy and power, and have a self-interested reason to manipulate economic statistics. When they reach or exceed the central government's economic goals, they get rewarded with better jobs or more money. “The higher [their] GDP [figures], the higher the chance will be for local officials to get promoted,” explained Liu [Gary Liu, deputy director of the China Europe International Business School's Lujiazui International Financial Research Center]. …

China announced a $600 billion stimulus package (equal to about 14 percent of GDP) last fall. At that point, local governments started counting the dedicated stimulus funds in GDP statistics – before finding projects to use the funds, and therefore far before the trillions of yuan started trickling into the economy. Local governments keen to raise their growth and production numbers said they spent stimulus money while still deciding on what to spend it, one economist explained. Thus, China's provincial GDP tabulations add up to far more than the countrywide estimate.

Although Chinese statistics are often accepted at face value in the western press, they are widely derided within China. The Financial Times reported on 5 Aug, in an article entitled "China's growth figures don't add up":

The Global Times, controlled by the People's Daily, the Communist party mouthpiece, said the public reacted with “banter and sarcasm” to NBS figures showing average urban wages in China rose 13 per cent in the first half to $2,142.

It quoted an online poll showing 88 per cent of respondents doubted the official numbers.

An editorial yesterday in the China Daily, the government's English-language mouthpiece, quoted another survey that found 91 per cent of respondents sceptical of official data, up from 79 per cent in 2007.

The following 10 Nov story of “China's empty city” is just one anecdote, but there are many other similar stories, so it is a useful illustration:

(Credit: Al Jazeera. If the embedded video does not play correctly, see it on YouTube.)

There is certainly some level of recovery in China. How robust it really is we will not know for some time.