China growth picks up but raises concerns

The country’s growth rate accelerated to 8.9 per cent in the third quarter, fed in part by government stimulus spending. Prompted by vastly increased bank lending, generous government support for exports and a $585 billion stimulus package that is spurring a dizzying array of building projects, the Chinese economy grew 8.9 per cent from July to September, up from the year-ago period, according to government figures . Separate economic reports  also showed that retail sales and industrial output rose markedly in September, helping to offset the slump in exports, a mainstay of the Chinese economy, that has continued unabated for 11 months.

The rate of expansion of gross domestic product jumped from 7.9 per cent in the second quarter, putting the nation on target to reach the 8 per cent growth level that Chinese economists say is required to maintain healthy employment and social stability. Although welcome news to the legions of workers who lost their jobs this year, China’s recovery has begun to raise some concern about possible inflation and a potentially unsustainable rise in stock markets and property prices. “The government is quite wary of starting another bubble,” said Alistair Chan, an economist at Moody’s Economy.com.

The state-controlled banking system has given out a record $1.27 trillion in new loans this year, and some analysts have warned that too much of that money has ended up in stocks and real estate.

Property values in mainland China have soared 73 per cent this year. And the country’s stock market rose 80 per cent during the first seven months of 2009 before falling back as bank lending began to retreat to more normal levels and a flood of initial public offerings helped quench the thirst for investments. The Shanghai stock market is still up nearly 67 per cent this year.  Despite the emergence of possible bubbles in stocks and property markets, some Chinese officials still warn that the Chinese economy remains on the rocks and that its expansionary policies will remain in place for now.

Recovery not solid yet

“China’s economy is at a vital moment of recovery and stabilisation,” Li Xiaochao, spokesman for the National Bureau of Statistics, told journalists in Beijing, according to Reuters. “The foundations of the recovery are still not solid, the pressure on external demand is still serious, and it is still an arduous task for us to expand domestic demand and adjust the structure of the economy.”

Exports are a major economic driver. While recovering somewhat, they are well below the level of previous years as Western economies begin to emerge from recession. As a result, economists do not expect any major steps in monetary or economic policy, like raising interest rates. “They’ll take small, administrative steps,” Chan said. Analysts say that could include increasing the amount of money banks must hold as reserves or cutting back bank lending. Earlier this month, Australia became the first major economy to raise interest rates again, reversing some of the steep cuts it had made when a recession began in many parts of the world last year. The rate increase, on October 6, was by a modest one-quarter of a percentage point and left the key rate low. But it showed that some of the world’s most resilient economies are now ready to start unwinding some of the extraordinary policy measures they instituted at the height of the global crisis. The European, Japanese and American economies remain much more feeble than China’s, or even Australia’s. The United States economy shrank 0.7 per cent during the second quarter.

Even in less dynamic economies a policy debate is under way as to whether the time is now ripe to start taking the economy off life support, or whether a precipitous withdrawal of the emergency stimulus measures could risk nipping the recovery in the bud.The Chinese authorities face the added challenge of rebalancing the economy for the longer term. Many economists argue that the country needs to be weaned off its reliance on exports and that domestic demand needs to be fostered via improved social safety systems, education and health care — all deemed crucial in encouraging ordinary Chinese citizens to save less and spend more.

The credit crisis caused demand in Europe and the United States to collapse late last year, resulting in a serious decline in exports of goods from Asia.
Although the pace of decline has leveled off, exports remain well below where they were a year ago. Japan, for example, reported Thursday that exports in September were 30.7 per cent lower than September 2008 levels.