China’s economic activity more stable than you think

So just what is happening with the Chinese economy? Are the bulls or the bears right?

The bears have been much in evidence in the past few months, as economic data painted a picture of a slowdown in the world’s second largest economy. The prospect of a hard landing was looking very real, and the global economy began to steel itself for the repercussions.

Then, after months of hard landing fears, suddenly the data turned China’s way.

Industrial production was up 9.7 per cent in July from a year earlier, the biggest increase since February, while trade data showed both exports and imports increasing – exports were 5.1 per cent and imports 10.9 per cent, higher than a year earlier.

Retail sales were virtually unchanged in July from June, increasing 13.2 per cent from a year earlier, as was fixed asset investment, which in July was up 20.1 per cent year-on-year, and property investment was up 20.5 per cent year-on-year.

The consumer price index in July was unchanged from June at 2.7 per cent, while producer prices continued to fall but at a slightly slower rate than in June.

The backdrop is that there has been a certain amount of confusion about China's growth targets. Finance Minister Lou Jiwei told reporters in Washington on July 11 that 6.5 per cent growth could be tolerated, but the state news agency Xinhua subsequently changed the report to quote Lou saying there was no doubt that China would achieve 7.5 per cent.

Premier Li Keqiang, who is charged with economic reform, said last month that seven per cent growth was China's "bottom line".

The credit rating agency Moody’s believes that China has put the worst behind it, as statistics for July showed that China’s economy was returning to normal status, but it did warn that recovery will be at a slow pace.

Geoff Raby, head of Geoff Raby & Associates and a former Australian ambassador to China, believes that the markets, and the media, overreact to economic data out of China.

In a column in the Business Spectator entitled "China bears lumber back to their caves", he said that calling a recovery or a stabilising of the Chinese economy is just as misguided as saying it was in meltdown just a few weeks ago.

“China’s economy has not been in a slump. The published data show that, over the course of five or six quarters, growth has slowed from somewhere near the top end of the seven to eight per cent range to somewhere near the lower end – hardly a crash.

Viewed over the full year, China’s economy is neither recovering nor slowing, but has recorded a fairly consistent growth rate throughout the course of this year,” he said.

Australian commentary on the Chinese economy is valued by investors because Australia's economic well-being is so dependent on China. Australia is China's biggest iron-ore supplier and exports to what is now its largest trading partner have almost quadrupled in five years.

Capital Economics said in a research note that data in the past month has brought some hope that economic conditions in China, and in another of the four BRICs – Brazil – might be improving, but it remains cautious.

“In China, data on trade, industrial production and investment have all surprised on the upside. For a start, the rebound in China has been driven by investment and fuelled by credit. This looks unsustainable,” its team wrote.

Capital Economics points out that China’s imports of commodities in particular were strong, which bodes well for commodity-exporting emerging market economies, which have struggled over the past year or so.

“Forward-looking indicators are also starting to improve. A weighted average of Markit’s ‘export climate index’ picked up in July and is consistent with an acceleration in emerging market export growth over the coming months,” the note said.

Slower growth is certainly there, however. The number of millionaires, or those with wealth worth at least 10 million yuan (€1.23 million) – rose by just three per cent year-on-year to 1.05 million, according to the Hurun Research Institute and consultancy GroupM Knowledge. And the number of "super rich" with at least €12.3 million rose by just two per cent, the survey showed.