There has been debate lately over whether or not the Chinese economy has turned the corner and is on the verge of faster growth. There have been some positive signs lately, suggesting that the worst is over. For example, the government reported in early November that exports in October were up 11 percent from the previous year, which is a much better performance than many analysts expected. In addition, there was a 9.6 percent increase in industrial production reported for October. These facts led some analysts to expect better economic growth in the fourth quarter than in the third. In addition, the government reported that inflation hit a 33 month low of 1.7 percent, offering the prospect of more easing by the central bank as it needn’t worry as much about inflation. Also, the government reported that retail sales grew slightly faster in October than in September, suggesting that the consumer side of the economy is on the mend.
Another important set of indicators pointing to improvement were the recent purchasing managers’ indices. Specifically, China has two purchasing manager’s indices (PMIs) for both manufacturing and services. One is published by the government and the other by HSBC/Markit. The government indices are more heavily weighted toward state-owned companies. For manufacturing, both indices improved in October. The private sector index increased from 47.9 in September to 49.5 in October. The government index increased from 49.8 in September to 50.2 in October. A reading below 50.0 indicates a decline in activity. Consequently, the private sector index suggests continued decline but at a much slower pace, and the government index suggests renewed but modest growth.
As for the PMI for services, the one issued by the government suggested an acceleration in services output. The index increased from 53.7 in September to 55.5 in October. The other index, released by HSBC/Markit, showed a deceleration from 54.3 in September to 53.5 in October. The government index is weighted more heavily toward state-run companies, which have lately been the recipient of stimulus funding from the government. Both indices suggest that services output is rising at a reasonably good pace.
Still, the economy continues to exhibit problems stemming from external phenomena. Consider the Canton Fair, which takes place twice a year in Guangzhou. It is a major venue for the promotion and sale of Chinese apparel and electronics products. Activity at the Fair is a good indicator of global demand for Chinese goods. In early November, it was reported that sales at the Fair were down about 10 percent from the event held earlier in 2012. Moreover, sales to Europeans were down 10 percent, and sales to Japanese were down 30 percent—the latter probably reflecting the political tension between China and Japan.
Politics and reform
In early November, China’s Communist Party held its Party Congress in Beijing. A variety of speeches provided possible clues as to the future direction of policy. Outgoing Chinese President Hu Jintao said that state-owned enterprises (SOEs) should be strengthened, especially in strategic sectors. Yet he also said that the SOEs should be more market-oriented. Does he mean that they ought to be subject to more competition? This was not clear. He did say that China should retain “the basic economic system in which public ownership is the mainstay.”
Another issue is the need for China to shift away from export-led growth toward consumer-led growth.
Hu also said that China should plan to double per capita GDP from 2010 to 2020. This is a realistic goal, if growth does not slow down any further. This might require new reforms aimed at maintaining long-term growth in the face of challenging demographics. Indeed Hu hinted at reforms by calling for the private sector to have “equal access to factors of production.” He also called for improving the ability to innovate and for a boost to domestic demand. The equal access for the private sector is significant. Today, state-run businesses have favorable terms of credit. The result is that private sector businesses, especially smaller ones, must often pay relatively high rates of interest. Reformers in China want to free up market interest rates that are now set by the central bank and allow all borrowers to compete freely for credit. Such reform of credit markets could have the effect of reducing the profit margins of state-run businesses.
Another issue is the need for China to shift away from export-led growth toward consumer-led growth. Rising wages are helping to make this happen. For example, in the past three years, the wages of China’s migrant workers increased 56 percent, but exporters have not passed on this cost increase to their customers. The prices of US imports from China rose only 4 percent in the last three years. Absent huge productivity gains, this pattern cannot be sustained as it would herald disappearing profit margins. Rather, export growth is likely to decline, and with big wage increases, consumer spending in China should grow faster. Market-opening reforms could transform China’s economic structure to accelerate in an orderly manner.