China’s Zero-Growth Economy

Forbes– On Friday, the National Bureau of Statistics announced that China’s production of electricity surged 20.6% in February.  This follows a fall in output in January reported to have been between 5.1% and 7.5% (NBS, inexplicably, has not released a kilowatt figure for the first month of the year).

The statistics bureau reported that electricity production for the two-month period increased 7.1% over the same period last year.  NBS combined the two months to eliminate the statistical distortions caused by the Lunar New Year holiday, which fell in January this year and February last year.

Because electricity output, the best indicator of economic activity in China, invariably outpaces the growth of gross domestic product, it’s apparent theChinese economy is expanding only in the low single digits.

Premier Wen Jiabao spooked markets around the world this month by dropping the central government’s 2012 growth target from 8.0% to 7.5%.  News reports of his announcement invariably note that the Chinese economy always outperforms the target.  This year, however, it might not.  The National Development and Reform Commission, part of Wen’s State Council, predicts China’s power production will rise 7.5% in 2012.

China’s second best indicator is cargo shipments.  The Shanghai port, the world’s busiest, reports that container throughput was up 3.6% and other cargo up 7.0% for the first two months of the year.  China Eastern Airlines, the Shanghai-based carrier that is China’s second-largest, sees lower cargo demand at the moment.

Total vehicle sales are in the tank.  They fell 6.5% for the first two months of the year.  Bellwether passenger cars were down 4.9%, and commercial vehicles were off 12.3%.

New lending for the January-February period was down 8.2%.

The closely watched HSBC Purchasing Managers’ Index showed contraction in the manufacturing sector in both months.

Trade figures also point to a decline.  Headlines in the last couple days focused on the February deficit, the worst since 1989, due largely to faltering demand from Europe, but the real news is that domestic demand is not driving imports.  Imports were up only 7.7% for the two-month period, and that was only because of continued stockpiling of commodities.  Purchases of foreign oil exceeded records, and copper imports were high as well.

Once you strip out commodity purchases, consumer consumption appears as if it has flatlined in the last two months, something evident from the tumble in the Consumer Price Index.  February’s inflation came in at a stunningly low 3.2%, down from January’s 4.5%.

Even the positive-looking indicators point to trouble.  Value-added industrial output was up 11.4% for the two months, but this was off December’s 12.8% increase and well below analyst expectations.  The rate of fixed asset investment growth for the January-February period—21.5%—was the lowest since 2002.

Even if Beijing’s numbers are accurate—and there are real problems with the critical electricity figures—it’s evident the Chinese economy is trending to low single-digit growth.  As Zhiwei Zhang, a Nomura economist, told the Wall Street Journal, “The slowdown is happening faster than the government expected.”

At the moment, most observers see China’s economy growing about 8% this year.  They downplay the possibility of a “hard landing” because they anticipate the central government will start to stimulate the economy soon, primarily by dropping the reserve ratio requirement.  Yet Beijing did that in November and this month, and so far it has not had much effect.

Nobody sees a return to Beijing’s “tidal-wave investing” of the 2008-2009 period.  To his credit, Premier Wen does not want to over stimulate the economy again, and even if he did he no longer has the tools to do so.  Therefore, one has to wonder what he will do this time to get growth back on track.  This is not to say that 7.5% growth is unattainable, but it is attainable only if Beijing takes decisive measures and does so soon.

In the meantime, the January-February results indicate that the downward slide, evident in the last quarter, is picking up momentum.  At the moment, China is heading to an essentially zero-growth economy.

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