Article - Bullish Chinese ox to save world?

Peh Shing Huei & Grace Ng
The Straits Times
Publication Date: 06-02-2009

Chinese companies had started the year on a sombre note amid a worsening economic outlook.

But firms like mould maker China Kunda are seeing a brighter side, amid signs that the storm clouds over the Chinese economy are starting to clear.

The Shenzhen-based company - which supplies moulds to industries like the car sector - notes that 'preliminary indications' from its customers show they are upbeat about the future.

"During our discussions with our customers, they have indicated that they remain optimistic about the prospects for products like certain automobile parts, personal computers and notebooks this year," Hau Khee Wee, chief financial officer of China Kunda, told The Straits Times.

Indeed, the Year of the Ox may turn out to be a bullish one for China after all.

After months of doom and gloom, analysts and experts now believe that there is a glimpse of light at the end of the tunnel for the world's third-biggest economy.

While they differ on the length of the tunnel that China still needs to claw out of, most agree that the worst seems to be over for this country of 1.3 billion.

It is a sentiment shared by the leaders of the Chinese Communist Party.

Last month, Premier Wen Jiabao gave the first signs of a rebound when he told a business audience in China that the latest economic numbers revealed an early recovery from the global financial crisis.

Earlier this week in London, Wen - who was greeted with "I Love Bao Bao" or "I Love Babe" (an affectionate play on his name) placards by Chinese students in the British capital - gave the Chinese people even more reasons for love when he reiterated his words of confidence.

"During the last 10 days of December it started to get better. The goods piled up in port started to decrease and the prices of industrial products started to rise,' he said, adding that 'there is light at the end of the tunnel".

The numbers backed up his words.

China's official manufacturing index - the purchasing managers' index (PMI) - for last month rose to 45.3, up from 41.2 in December and a record low of 38.8 in November.

There was also a surge in bank lending as Chinese banks answered the calls of the government. A record 1.2 trillion yuan (US$176 billion) of new loans were extended last month, reported the China Securities Journal on Wednesday (february 4). This suggests that more companies would now have more money to survive the crisis.

"The worst of the slowdown in the Chinese economy may be behind us now, judging from the latest PMI and lending data," said Credit Suisse economist Tao Dong.

Merrill Lynch economist Ting Lu was even more optimistic, saying that the numbers pointed to a 'V-shaped recovery' and 8 per cent gross domestic product growth for this year.

A reason behind this modest turnaround is the 4 trillion yuan stimulus package announced late last year by the Chinese government.

Although only a small portion of that largesse has been spent - largely on rebuilding the earthquake-hit south-western Sichuan province and improving road and rail networks - the effect is already felt.

Even less optimistic analysts agree that China is looking at a recovery this year, albeit only in the second half.

"I don't think there will be a sharp V-shaped recovery - we are expecting more of a U-shaped recovery: slow in the first half of the year and then a pick-up in the second half," said Standard Chartered economist Stephen Green.

HSBC economist Qu Hongbin echoed his reading, calling it 'a year of two halves' for China's economy.

"Weak in the first half with exports and the property market going down, but stronger in the second half as the government's aggressive stimulus package takes effect after winter, which is typically the slow season for the construction sector," he said.

But the Chinese are not grinning just yet.

Wen had acknowledged in London that there is still much more work needed, including a possible dip into China's huge foreign currency reserves for domestic purposes.

"We may take further new, timely and decisive measures. All these measures have to be taken pre-emptively before an economic retreat," he told the Financial Times.

And if the Chinese government needed a sobering number to forestall any premature celebrations, a top rural official provided it just hours after Wen's comments in Britain were published.

Chen Xiwen revealed on Monday morning that some 20 million migrant workers in China have lost their jobs as a result of the crisis - a figure that is two to three times higher than previous official estimates.

It is the clearest indicator that China, while inching its way out of the crisis earlier than any of the major economies, has also suffered a far more painful bite than most had anticipated at the onset of the crunch.

Economist Lu Ding of the University of the Fraser Valley pointed out that China's malaise actually started before the global crash. Reforms and adjustments to the Chinese economy - such as the removal of export tax rebates and the new labour contract law - had already hurt exports.

"The coincidental impact of the US-originated financial tsunami has accelerated the decline of exports to a crash," he told The Straits Times.

There are also experts who believe that whatever recovery China makes in the coming months would be marginal, given how the world is still mired in recession.

"We doubt there will be a V-shaped recovery despite some signs of mild recovery in the past month as we believe China is not able to jump when the global economy is still sinking," said OCBC bank economist Tommy Xie.

Even if China does indeed jump, there is little hope that it would be the global swing factor, the saviour of the world.

"China can save itself but not the world," said Tao, noting that China's recovery is driven by infrastructure investment, which will boost demand for local materials and labour.

Added Dr Green: "China has limited ability to pull the rest of the world economy out (of a slowdown) through its imports. It is a net importer of unfinished components as well as some raw materials such as iron ore and some oil products. It doesn't import much manufacturing goods from Asia or the rest of the world. So it is also unlikely to be a growth engine for Asia."

Xie disagreed, saying that China is still "one of the key engines" for the global recovery.

"Chinese high savings and huge foreign exchange reserves are the important weapons to fight the shrinking global economic activity," he said.

But whatever the impact of China on the world, a Chinese rebound that comes sooner than its rivals' - Japan in particular - would certainly have repercussions that extend beyond the crisis.

"I expect China will surpass Japan as the world's second-largest economy by the middle of next year," said Qu.

Such a switch in 'rankings' would not be as understated as China's rise to third place over Germany last month.

The long-time rivalry, and at times enmity, between China and Japan would surely engender a surge in Chinese nationalism - if and when it overtakes Japan for the world No. 2 position, behind the United States.

Happy New Year? For the Chinese, it could well be.