Premier Wen Jiabao was at it again in early September: At the World Economic Forum in Dalian, Wen reiterated Beijing’s stance that it would maintain an accommodative monetary policy. Government spending, he said, would be “unprecedented.”
Wen’s comments reflected continuing concern in Beijing over the sustainability of China’s economic recovery in a weak global environment. “What you are likely to see is continued uncertainty over the types of external demand that will be beneficial to China,” said Glenn Maguire, chief Asia-Pacific economist at Société Générale. “And that essentially is the return of a very strong Western consumer.”
Data released in September showed that China’s economy continued its rebound in August. Growth of industrial production (12.3%), fixed-asset investment (33.6%) and retail sales (15.4%) were all higher than had been expected. Earlier data supported a positive view of growth, including the purchasing managers’ index (PMI), which rose to 54.0 in August, above the expansionary threshold of 50, and an improvement over 53.3 recorded in July.
But the encouraging PMI numbers – particularly export orders – were not supported by other data. Exports fell 23.4% year-on-year in August, from 23% in July, and imports were down 17%, from 14.9% in July.
Logan Wright, a Beijing- based analyst with economic research firm Medley Global Advisors, points to a search for early signs of a recovery for a new global emphasis on China’s PMI data. “The truth is that throughout the entire boom cycle in the last several years, we didn’t look at the PMI that carefully,” he said. “They’re as good indicators as you can get when you’re interviewing hundreds of companies per month, but at the same time it just shows never to put too much faith in one data point.”
Nevertheless, many economists have taken the August data as an encouraging sign that China’s economy is well on its way to recovery. Merrill Lynch economists Lu Ting, T.J. Bond and Zhi Xiaojia said that the numbers were positive in markets from stocks to commodities, and reiterated their annual GDP growth forecast of 8.7% for this year.
Talk of a recovery has led to discussion of what steps Beijing might take to disengage government stimulus, a discussion accelerated by continuing high bank lending numbers; banks lent out US$60.11 billion in new loans in August. At Dalian, Wen said stimulus measures would fade over time, but gave little information about a possible exit strategy.
Maguire of Société Générale said such an exit was still some time off, although it could begin through the draining of liquidity from the system by increasing banks’ reserve requirements in the first half of 2010. The Merrill Lynch economists suggest a two-stage process, starting with fine-tuning and cooling measures including slowing new project approvals in the near term, and then proceeding with tightening measures next spring.
Wright says predicting the government’s exact plan is difficult, though Beijing’s frequent reiteration of an accommodative policy stance made rapid change unlikely. “I think you’ll see a give and take process between the banks and the central bank over the pace of credit growth, and it will be a quiet policy debate,” he said. “[But] I don’t think you’ll see much action on the monetary policy front in the short term, or even in the next three to six months.”