China’s economic figures have surprised the market on the upside, and many economists believe the economy is bottoming out after moderating markedly since 2013.
Economies experience boom-bust cycles, and there is usually a lot of pain during the bust phase of the cycle.
However, China’s economic slowdown has yet to result in any significant pain so far, in terms of unemployment, company closures and bad loans.
So, it might be naive to think the worst is already behind us.
A set of economic data for March is very promising.
In particular, the worrying capital outflows have come to an end.
China’s foreign exchange reserves increased by US$10.26 billion as of the end of March, the first increase since late 2015.
In the meantime, the number of foreign-invested companies increased 26.1 percent in March from a year earlier, reversing from the 11.4 percent slide in the first two months of this year.
Actual utilized foreign capital increased 7.8 percent last month, compared with 2.7 percent growth in the previous two months. That also reflects improving confidence in China among foreign investors.
In addition, the purchasing managers’ index (PMI) rose to 50.2 percent in March, up 1.2 points from the month before.
That beat the market expectation of 49.4 points. It is the first time the index has returned to expansion territory (above 50) since August last year.
China’s exports also surged 18.7 percent in March, versus a 20.6 percent contraction in the month before. That’s the first growth in nearly nine months.
Even electricity consumption, seen as the most reliable indicator of the health of the economy, grew 5.6 percent in March, accelerating from a 0.5 percent rise last year.
That explains why Vice Premier Zhang Gaoli said at a conference March 20 that China’s economy has shown signs of improvement in the first quarter.
Also, several economists, including Ba Shusong, chief China economist of Hong Kong Exchanges and Clearing, have switched to a more optimistic note and said China’s economy has already come out of the woods.
On Tuesday, the International Monetary Fund nudged up its forecast for China’s economic growth this year to 6.5 percent from 6.3 percent, while it trimmed the outlook for the world as a whole.
That’s a vote of confidence in China.
However, some people are not yet convinced that China’s economy has completed a soft landing.
We have not seen any sign of substantial pain in China, such as a spiking unemployment rate, large waves of company closures or an outbreak of bad loans.
There are three ways to read the situation.
First, the economic pickup in March was just a technical rebound.
Apart from a low base in the same month last year, various sectors have been too aggressive in reducing inventory in recent months. Therefore, they needed to do some stock replenishment, which led to a temporary uptick in economic data.
However, we might see the economy dip again in two or three months.
Second, the most ideal explanation is that governments have been able to shorten the length of the recession cycle as much as possible after nearly 100 years.
For example, the United States has unveiled massive monetary measures to prop up its economic growth.
China has been focusing on supply-side reform instead of stimulating the demand side.
The third reading is that China’s emerging service and internet sectors are able to offset the contraction in the traditional manufacturing sector, in terms of generating economic growth and providing jobs.
It remains unclear which explanation is correct.
We will have to wait three months or so to come to a conclusion.
This article appeared in the Hong Kong Economic Journal on April 14.
Translation by Julie Zhu
[Chinese version 中文版]
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