Gordon G. Chang: Recovery In China? Not So Fast

Gordon Chang writes for Forbes:

Last week, the World Bank delivered the news that everyone wanted to hear: The Chinese economy is on the road to recovery. In its June 2009 Quarterly Update, the institution lifted its estimate of China’s 2009 growth to 7.2% from the 6.5% it forecast in March. Banks scrambled to push up their estimates at the same time. Barclays, for instance, now believes the Chinese economy will grow 7.8% this year. Nomura predicts 8.0%, the same as Premier Wen Jiabao’s optimistic target announced in January.

These institutions were behind the curve in lifting growth projections, however. Investors have been betting for some time that the worst is over for China. Hong Kong’s H-share market, of companies incorporated in mainland China, is up by about 60% since March. You can bet your bottom dollar–as some evidently have–Beijing will announce that second-quarter growth will top the 6.1% gain seen in the first. The worst downturn in a lifetime appears to be over, at least as far as China is concerned.

Maybe not. As an initial matter, it’s not clear the Chinese economy has ended its recessionary phase. Growth was undoubtedly negative in the first quarter–despite Beijing’s claim–and the same forces that caused the contraction are still at work. Most important, exports have continued their slide, which accelerated in the first two months of the current quarter. In the second quarter so far, exports dropped 22.6% in April and a record 26.4% in May. That’s not a good sign for an economy where about 40% of GDP is attributable to sales abroad.

Yet exports are not the only signs pointing to deteriorating economic conditions. Imports, another crucial indicator of economic activity, were also down for the first two months of the second quarter. On top of that, consumer prices declined in April and May as did profits at state firms and the generation of electricity. Foreign direct investment, an important factor powering growth in China during the last two decades, declined for the eighth straight month in May, when it fell 17.8%.

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