China's Economy Throws Off Mixed Signals

Jan 11, 2013

What to make of China’s economy? First the good news: On April 1, China’s logistics federation and the National Bureau of Statistics released the March Purchasing Managers’ Index (PMI), which with a 53.1 reading was at a one-year high, and showed the economy expanding. But a separate gauge published the same day, by HSBC (HBC) and U.K.-based market survey firm Markit Economics, showed instead manufacturing decreasing as export orders fall, the fifth straight month of a downward trend.

Just a day later, China’s likely next premier, Li Keqiang, also struck both somber and upbeat notes in his opening address at the Boao Forum on China’s southern tropical island of Hainan. “Achieving a full global recovery will remain a long and arduous process,” the 56-year-old vice premier cautioned, speaking at the three-day event that is touted as an Asian version of Davos and brings together more than 2,000 government, business, and academic leaders. Nevertheless, “the fundamentals of the Chinese economy remain good, and the momentum of economic growth has not changed. We will be able to maintain steady and relatively fast development in the long term,” Li said.

This year’s gathering included World Bank President Robert Zoellick, Bank of Israel Governor Stanley Fischer, and Italian Prime Minister Mario Monti, as well as Kazakhstan’s Prime Minister Karim Masimov and Pakistani Prime Minister Yousuf Raza Gilani.

In part the mixed messages on China’s economy reflect what is being measured. While the HSBC index focuses more on smaller enterprises, many of which may be facing credit squeezes and suffering as China’s largest export market in Europe struggles with the debt crisis, the official PMI is skewed toward larger Chinese companies, argues London-based research consultancy Capital Economics.

“The rise in official headline PMI was driven by large firms, with their sub-index jumping from 50.9 to 54.3. By contrast, the small-firms sub-index fell from 55.2 to 50.9. This might also help to explain the drop in the HSBC/Markit index, which gives a higher weight to smaller firms,” wrote Capital in an April 2 note.

But it’s also because the official gauge has consistently showed a seasonal bias to rise in March, after China’s winter season. “The official PMI might be too optimistic, as the much better performance in the index probably reflects its seasonal strength around this time of the year rather than a significant improvement in conditions for the sector,” wrote Capital Economics. The official index has never declined in March, with an average increase of 3.2 points that month, since it was launched in 2005, according to Capital. This year the rise was slightly smaller, up from 51 in February to last month’s 53.1 reading.

Chinese Vice Premier Li Keqiang, speaking at Boao, stressed the need for China to continue opening its economy. That call has a new resonance following the political fallout from the sacking Bo Xilai, the former Chongqing party secretary, who was seen as a proponent of a more state-controlled, less reformist path for the Chinese economy. “Faced with the profound changes in international and domestic landscapes, we must let reforms and opening-up continue to lead the way in removing the institutional obstacles that hamper the shift of the growth model,” said Li, who is expected to become premier at China’s National People’s Congress in March 2013.

Those continuing reforms include how financing can be distributed more fairly to China’s state and private companies, efforts to deal with China’s widening income distribution gap, and an expanded role for markets in allocating all kinds of resources. Li’s speech, too, seemed aimed at soothing foreign investors who fear that China of late has been tilting its economy toward one that favors state enterprises over foreign and private companies. China is “dedicated to creating an open, transparent, fair, competitive, and predictable marketplace and legal environment,” Li said, stressing the need for stronger intellectual property rights protections.

Li emphasized the need for China and all of Asia to continue with a rebalancing push toward more domestic-driven economies, in part to make up for a downturn in the developed world. “While continuing to unleash its comparative advantages in global competition, it is important for Asia to explore and expand markets of domestic demand,” said Li. And with 45 percent of the global population, as well as gaps in development between and within the region’s countries, Asia still has lots of room to grow, he said: “Expanding domestic consumption is our top priority in adjusting the economic structure.”

China has set a 7.5 percent target for economic growth for this year, down from 8 percent in previous years. “Every time they’ve been faced with a growth challenge, they’ve responded very quickly and gone back to growth very rapidly,” Bank of Israel Governor Fischer said in an interview with Bloomberg Television at Boao. China “can’t keep growing at anything like these rates forever, but forever looks a little while off at the moment.”

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