How Real Is China's Recovery?

By Rosalind Mathieson

A Dow Jones Newswires Column



SINGAPORE --Relying on China to lead the global economy out of its slump is a little like driving a car through an intersection with your eyes shut. You hope it will be okay, but that churning feeling in your stomach suggests you don't really know.

No wonder, then, that financial markets are uneasy.

Monday's 5.8% slide in the Shanghai Composite Index was a cue for markets more broadly to go into conniptions. It was the standard "risk aversion" reaction: Yen up, bonds up, stocks down, metals down, oil down, emerging market currencies down.

Leave aside for a minute the relevance of China's relatively tiny stock market to its economy; there's no doubt the market is being viewed as a sentiment indicator of how China is faring.

And underlying that is the question everyone is asking: How real is the Chinese economic recovery, and how long may it last?

There have been niggling signs in the past week from July's data for industrial output, new yuan loans and investment, and that has people more dubious about the strength of China's rebound; caution is also warranted when the basis for many of China's data calculations is unclear.

It's also warranted given just how much we've pinned our hopes in the past six months on China to buy raw materials and goods from Australia and the rest of Asia, and also places like the U.S.

So we've all got a bad case of the nerves. What now?

The run-up in global share markets has been pretty strong in recent months, and some correction is probably warranted. Ditto for emerging market currencies and the likes of the Australian dollar.

But let's not panic. There are grounds to think China's recovery will remain, even if it's not as rapid as many excitable types had suggested would be the case. Anyway, wouldn't we prefer a slower - but more durable - rebound, than a rapid, quickly overcooked one which brought a whole separate slate of problems with it?

Exports data from various parts of Asia - South Korea, Taiwan and Japan - indicate there is real demand coming from China.

That demand may be front-loaded, and inventories may start to pile up (Singapore's exports data for July showed exports to China fell at a slightly faster pace than June), but China is unlikely to pull the pin entirely on buying things from offshore.

Huang Guohua, director for international trade statistics analysis with China's General Administration of Customs, said last week that rapidly-rising imports for processing trade, whereby materials are imported duty free to be processed into exports, are a positive sign.

Indeed, China's July imports rose compared to June. As did exports.

The iron-ore deal inked between Fortescue Metals and the Chinese steel mills Monday -plus the scavenging missions Chinese companies have been on to snap up stakes in miners and oil producers in Canada, Africa and Australia - indicates Beijing is still hungry for supply, and other data have indicated no great slowdown in its imports of key raw materials.

There are problems with the China recovery story. Liquidity and a free-for-all on credit are pushing the property and stock markets around, and adding to the threat of inflation at a time the economy can hardly afford it.

Managing the recovery will be a difficult task, and Beijing is likely to make some mistakes in its desire to be the first one out of the mire. There will be periodic indications that all is not well.

But growth is likely to stick in China. It may not be the blockbuster level we all want, but in the end blockbuster may not be what we really need.