China: Increased Government Spending Raises Economic Projections but is it Sustainable?

Purchasing Managers Index (PMI) surveys undertaken by Beijing’s National Bureau of Statistics (NBS) and the multinational banking and financial services firm HSBC show that China’s economic growth may be rebounding from its prolonged doldrums. These two surveys include data from that nation’s entire manufacturing sector as the NBS focuses on big, state-owned firms while HSBC collects data from smaller, privately-held, export-focused firms. Consequently, the positive data in these two surveys is a good news story for the global economy, in general, and China, in particular.

This picture, however, isn’t quite as rosy if one looks into the composition of this data. Both surveys make it clear that this positive news is largely due to government spending and not the private sector. For example, the construction industry, which saw the strongest growth in these surveys, is being driven by Beijing’s liberal funding for major projects. On the other hand, industries that rely on the private sector – such as air and rail transport, and food and beverages – contracted. In addition, while Beijing’s assistance to debt-laden private sector firms has helped prevent the collapse of a number of inefficient and unproductive firms thereby helping smooth the country’s troubled economic waters, these bailouts have, and continue to, increase pressure on the government resources. Now, this shouldn’t be of any major concern given the government’s massive reserves, but it should give one pause when assessing the overall strength of the country’s economy.

More troubling is Beijing’s preference for providing easy credit to state-owned firms and infrastructure projects at the expense of the private sector. Consequently, the country’s economic growth may be less vibrant than had it been driven by the private sector, which continues to struggle with tight credit and a slowly recovering speculative real estate sector. The private sector also continues to be hurt by the slow global recovery but, in a weird contradiction, the surveys show that factory output to retail sales, new domestic and export orders, and investment have all grown. Adding to concerns is the increasing price pressure on Chinese firms who have been unable to pass on their rising production costs to consumers. So, if China’s two largest markets – Europe and the United States – are still weak, then where are all these products going? Also, if the companies cannot pass these costs on to their customers, how is that affecting their margins?

In conclusion, the survey results are a positive signal for short term economic growth but it’s unclear how Beijing’s measures will help long-term economic recovery. These thoughts may not be of primary concern to the Chinese leadership since they are likely currently concerned with immediate perceptions amid the recent political transition. It will be interesting to see what GDP projections come out of mid-December’s Central Economic Work Conference. Regardless, what these surveys do show is the potential for long-term economic growth and, if Beijing can manage and expand this growth, these surveys may be a preview of good news for the global economy.