A ninth consecutive monthly fall in exports in July – by 23% – came as another reminder that China’s economic recovery would not be without its setbacks. It was not the only indicator showing a decline. Urban fixed-asset investment growth fell 32.9% between January and July from the first-half figure of 33.6%. Industrial production was up, but at 10.8% growth, came below market expectations.
Investors, however, appeared more worried by the decline in another set of figures: Bank lending fell US$52 billion in July from more than US$219 billion in June. While this did not reflect a change in Beijing’s monetary policy – which both the central bank and leaders as senior as Premier Wen Jiabao repeatedly insisted would remain "moderately loose" – the first sizable corrections in domestic stock markets this year indicated that investors were not convinced.
Despite fears of tightening, however, economists say the government has plenty of room for continuing a moderately loose policy.
"[The economy] is not overheating," said Wang Qian, senior China economist at J.P. Morgan in Hong Kong. "In fact, I would say that given the very weak exports, I do not think the economy is back to solid footing yet."
The government would seem to agree. In explaining its desire to maintain a relatively loose monetary policy, Beijing has said the economic recovery remains on shaky ground. Industrial output data lends strength to this argument: growth was concentrated in heavy industries, which have been the focus of government investment.
Disappointing export and industrial production numbers aside, however, Beijing’s stimulus and a resilient consumer sector – retail sales were up 15.2% in July – have ensured that the country is on track for strong growth in 2009. Ken Peng, China economist at Citigroup, raised his 2009 growth forecast to 8.7% from 8.2%, noting "more signs of durability" in China’s growth outlook. External factors, including a brighter outlook for the US economy, are also a contributing factor.
However, Peng notes that the US$1.1 trillion in new lending in the first half means bad loans remains a real risk in the longer term. "They could be covered up for a long time," he said.