Is China turning the corner?
There has been a lot of distressing analysis regarding China’s economy and its impact on global growth, but the world’s second largest economy finally could be turning around. There is evidence that a Chinese economic recovery is near. This is in stark contrast to the majority of economists and analysts that say there is more pain in store for China. Many analysts are predicting the slowdown could escalate into a hard landing.
Let’s begin by talking a little history. Because of the prospects of the slowest growth rate since the global recession in 2009, China appeared to be getting serious about halting a downturn in its economy in January of 2015, when there were reports that the government was about to embark on a massive stimulus package. A $1.1 trillion package was designed to expedite hundreds of infrastructure projects across China, from healthcare to mining. There was a host of other stimulus efforts that were announced later, including a series of reserve ratio cuts.
Most analysts were unimpressed with any of the government’s stimulus initiatives in 2015 because there appeared to be few signs that the stimulus was having any positive effect on the economy. Economic indicators did not look pretty in 2015 and many enterprises were facing declines in profits or outright losses.
Then in January of this year something miraculous happened. Money supply growth and bank lending surged. Could it be that the stimulus was finally having its desired effect? The answer is, “Yes.” What economists failed to consider is that any major change in a country’s central bank policy can take as long as a full year before it filters into the economy and actually shows up in economic statistics. This is exactly what happened.
It took exactly 12 months from January 2015 when the massive stimulus was announced to January 2016 when there were major indications that the stimulus plans were working. The first signs of success showed up when China’s January 2016 bank loan data revealed the nation’s banks doled out a record amount of loans. China’s January aggregate financing totaled 3.42 trillion yuan, which far exceeded the estimate of 2.2 trillion yuan and new loans soared to 2.51 trillion yuan versus expectations of 1.9 trillion yuan. Some analysts attempted to explain the increase away as merely seasonal binge lending; however, harder to dismiss were the equally impressive bank lending numbers in February.
The surge in lending in January was accompanied by a rise in inflation. China’s consumer price inflation rose 1.8% from a year earlier, compared to 1.6% in the previous month, according to the National Bureau of Statistics. Then in February, China’s consumer prices shocked even more, accelerating by 2.3% from the previous year — the largest increase since the middle of February of 2014. That figure was matched in March, indicating this is not a one-time blip (see “Chinese inflation,” below).
Although it took a while for the accommodation to kick in, last year’s variety of stimulus measures also showed up in the industrial sector when it was reported that profits at Chinese industrial companies increased at the fastest pace in more than 18 months. Official data showed industrial profits increased 4.8% in January and February compared to a year ago and in contrast to the decline of 4.7% in December 2015. This was the fastest growth rate since July 2014. Recently released data for March showed industrial profits were even better, increasing 11.1% from a year ago (see “China building again”).
It also was reported that China’s commodity import volumes advanced in March with imports of all the major commodities increasing on a month-to-month basis. One of the best examples was copper imports, which grew by an astounding 30% in the first quarter on a year-to-year basis.