【澳大利亚人报】China's recovery is on shaky ground

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China's recovery is on shaky ground       http://www.theaustralian.news.com.au/business/story/0,28124,25489885-5018066,00.html
                                                                                          
Michael Sainsbury, China correspondent  May 16, 2009               

CHINA'S economic turnaround, on the back of its spectacular boom, is not looking so assured after all.

Aglut of disappointing data emerged this week highlighting the narrowfocus of the Government's 4 trillion-plus yuan ($770 billion) stimuluspackage, fuelling concerns it is not a sustainable base for the longerterm.
The questions are not about whether gross domestic product growthwill be 7 or 8 per cent this year, but about more fundamental andlonger-term issues.

Perhaps the biggest near-term problem is that the country's once booming private sector is struggling.

The huge licks of cash coming from the Government are being mainlydirected at the 170 state-owned enterprises controlled by the StateAssets Supervision Commission and a raft of provincial-owned SOEs.

While the factory closures and pain in the export-orientatedprovinces in the south and coastal east of the country have been welldocumented, the problems are continuing to spread across the country.

Beijing Hitech Company, in the suburbs of the Chinese capital, whichspecialises in using high-end technologies to stick together differentmaterials such as glass to steel and alumina to silicon, has beenforced to cut half its 70 workers.
"Business is no good, and my neighbouring factories complain thatthere is no business too," the company's production manager Yu Yongmiaosaid.

"Our best time was in 2006 and 2007, the first half of 2008 was not so bad, but the Olympics was a turning point."

Hiscompany lost more than 2million yuan when all factories were forced toclose during the Olympics. "Then the crisis came before our businesscould recover," Yu says.

"The central Government is investing,but mainly in infrastructure, not many buildings. Our products are usedin building interiors and exterior decorations, not on roads andbridges.

"We cannot see the bottom."

Yet only onemonth ago, the country's cheerleaders, including many investment bankseager for deals, were convinced they were on the winning side on theback of first-quarter economic data.

While gross domesticproduct hit a 17-year low, the underlying trend indicated that thedramatic slump in growth down from 13.1 per cent in 2007 and 9 per centlast year had bottomed. The Chinese Government's 4 trillion yuanstimulus package -- the biggest single boost to any country in globalfinancial history -- was hailed as a resounding success.

Australiaand the free-spending Treasurer Wayne Swan have a lot -- possibly eventheir jobs -- riding on a sustained recovery by China, which has had,until recently, an insatiable appetite for Australia's resources. Butafter growing at an average of 9.8 per cent each year for the past 30years, China's medium-term growth over the next few years will be morelike 7 per cent than 10 per cent, Royal Bank of Scotland analyst BenStimpendorfer says.

Data for April saw exports continuingtheir slump, down 22.6 per cent from a year ago, industrial productiongrowth weaker than expected and there was continued deflationarypressure.

The only bright spot, really, was surginggovernment-backed fixed asset investment. While no one is suggestingChina will stop growing soon, the recovery is patchy so far. Beyond theChinese Government's impressive fiscal viagra, private investment isstruggling, demand from the West will not return soon, reform hasslowed and trade imbalances remain a problem.

There have beenless than encouraging signs from China and other north Asiansteelmakers, which are among the biggest consumers of Australianminerals.

China's biggest steelmaker, Baosteel, which isleading iron ore price negotiations with Australia's producers, has cutits prices twice in the past two months.

As well, China hasstockpiled iron ore and other commodities and continues to demand a 40per cent cut in iron ore prices -- none of which is good news forAustralia's tax revenues and mining sector related employment.

Problematicallytoo for the Rudd Government, it is now discovering, like itspredecessors, just how hard it is to secure a free trade agreement withChina.

After blazing into office spouting Mandarin andlecturing the country about human rights on its home soil, Kevin Rudddeclared the talks unfrozen last year. Yet Trade Minister Simon Creanwas forced to change strategy on his recent visit to China, instigatinga two-track approach that brings in a bottom-up business-to-businessstrategy as well as continuing to pursue fading FTA hopes at governmentlevel.

There are real difficulties trying to get a good readon the Chinese economy, which is why most failed to predict its suddendownturn last year. It reflects the rest of the central command system:its operations are opaque and the powers that be only issue data thattells half the story.

The private sector, which makes up about70 per cent of the Chinese economy, is in many ways near invisible.There are no unemployment figures, payroll figures, private consumptionnumbers or unemployment statistics beyond a single number.

China'sshare markets in Shanghai and Shenzen have risen faster than anywhereelse, with a 57 per cent surge since November 20. But Jiang Xuewen, aBeijing-based private investor, is not sure the stimulus will have moreeffects than that in the market.

"Four trillion or 8 trillionyuan is like spraying sesame seeds into the ocean," he says. "Did yousee that the hotels near the National Development and Reform Commissionused to be full of officials from provinces and municipalities askingfor investment? The government projects and state-owned enterprises gotall the investment, but not private businessmen.

"The fulleffect (of the downturn) has not yet fully come to the surface. Thereis worse to come with millions of peasants losing their jobs."

Beyondthe immediate effects, there is also growing concern that reforms aretoo slow and structural economic problems will take longer to repair.

"Chinais not likely to collapse economically, and we may see one or morerebounds over the next few years, but the glory days of growth are welland truly behind us until, I suspect, the financial system issufficiently reformed that it leaves behind governance constraints thatalmost automatically assure systematic and massive capitalmisallocation," Beijing University economics Professor Michael Pettiswrites in his China Financial Markets blog.

"That will takemany years. Meanwhile the transition to a healthier and more balancedeconomy, which was slated to be long and difficult in the best ofcases, is likely to be longer and more difficult as a consequence ofthe fiscal and banking response to the crisis."

There's still growth in China, Wayne, but not as we know it.

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