Holes in the China Recovery Story

While the nation's growth strategy and comparative advantages may eventually prove the optimists correct, right now, at least, the China recovery story seems to have lots of holes in it.
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On Monday, China reported that its manufacturing sector had expanded for a third straight month. Along with Premier Wen Jiabao's plan to revive growth with a $586 billion stimulus package, the news bolstered hopes that one of the world's fastest growing economies was back on track, which would in turn help to put the worst of the global economic crisis behind us.

But is the China recovery story all it's cracked up to be? Evidence suggests that might not be the case, and that the economic outlook remains less-than-upbeat, to say the least.

Ironically, another report published on Monday by the China Banking Regulatory Commission offers one reason for pessimism. According to the CBRC (via Dow Jones), "the country's economy faces growing downward pressure as the global financial crisis has yet to run its course." The regulator added that "the banking industry faces 'serious' credit and market risks as the domestic economy encounters its 'most difficult year in the new century.'"

That's not all. In a statement released today, a Chinese government official noted signs of trouble in a key sector. Vice Minister of Commerce Zhong Shan warned "exporters were facing 'unprecedented difficulties' at present and that the situation would not improve amid the global economic downturn," Reuters reported. 'It is increasingly difficult for us to make a quick turnaround, and the trade situation will not be optimistic in the second half of this year,' Zhong said in a statement on the ministry's website."

At least one closely watched data series also casts doubt on the notion that an economic revival is at hand. Last week, Reuters wrote that "the decline in China's power output accelerated in the first 10 days of May to 3.9 percent from a year earlier, the influential Caijing Magazine reported on Monday, providing the latest evidence that the Chinese economic recovery still lacks a solid footing."

In addition, "nationwide electricity consumption via major grids had fallen 4.3 percent in the first 10 days of May, also 0.7 percentage points sharper than that for the last 10 days of April, it said, confirming earlier local media reports. The power data is considered by some as more of a leading indicator than manufacturing and export data."

Still, some insist that other developments tell a more bullish story. They cite, for example, the rebound in commodity prices and reports of strong demand from China for oil and other natural resources as a sign that economic conditions are improving in that country. But, again, there seems to be less there than meets the eye.

According to the London Evening Standard, a leading energy analyst found strong evidence that the run-up in oil prices in recent weeks stemmed from stockpiling, or hoarding, by the Chinese. Neil McMahon of Bernstein Research concluded that the rise "'reflects not strengthening demand, but rather China's efforts to boost its strategic petroleum reserve."

Even businesses with potentially more of a direct stake in China's domestic economy are questioning the Asian nation's near term prospects. Citing the latest issue of Woman's Wear Daily, Bloomberg reported that U.K. luxury retailer Harvey Nichols plc is "staying away from mainland China as most consumers don't earn enough to buy its fashions and real estate prices in big cities are too high."

In sum, while the nation's growth strategy and comparative advantages may eventually prove the optimists correct, right now, at least, the China recovery story seems to have lots of holes in it.

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