China's growth puzzle

WASHINGTON, May 4 (UPI) -- The official figures say the Chinese economy, bolstered by the announcement last November of a massive $586 billion stimulus package by the Beijing government, grew in the first quarter of this year at an annual rate of 6.1 percent.

The question remains how far those figures can be trusted because some official Chinese statistics have proved questionable in the past and because some crucial indicators suggest a far less optimistic picture.

The first sign of a dramatic fall in China's booming growth rates came last autumn, when the figures for electricity output, which have proved highly reliable, began to decline sharply. Output fell 4 percent in October, 9.6 percent in November and 7.9 percent in December. All these figures are year-on-year comparisons and do not represent cumulative declines.

The fall in electricity output has continued, albeit at a lower rate. In January, electricity output fell by 11.7 percent, according to the Beijing government, and by 13 percent, according to the China Electricity Council. This January figure was unusually high because of the holidays taken for Chinese New Year, which fell on Jan. 26.

The February figure showed a modest growth in output of 1.2 percent. But in March, output was down again, by 2.5 percent in the first 10 days of the month, by 2.2 percent in the second 10 days and by 2.7 percent in the final 10 days. This decline continued into April, with electricity output down 4 percent in the first 10 days.

Minxin Pei of the Carnegie Endowment for International Peace suggests that these declines may reflect lower activity in the steel and cement sectors, which are high users of energy. But steel and cement are the key industries for construction, into which much of China's stimulus spending has been directed.

Welcome to China's growth puzzle. China's claim of 6.1 percent annualized gross domestic product growth in the first quarter is very difficult to reconcile with the electricity output figures from the China Electricity Council, the Southern Power Grid Co. and the Coal Council, each of which gives slightly different figures, though the overall trends are very similar.

The China Coal Council breaks down industrial and domestic consumption and suggests that domestic electricity consumption fell by 5.2 percent in the first quarter but that industrial consumption fell by 8.38 percent. These are striking falls, particularly when compared with national electricity-consumption growth rates of 14.8 percent in 2007 and 5.2 percent for the whole of 2008.

The issue of China's energy use is important because China's recovery is the first hopeful sign that the world is starting to haul itself out of the Great Recession, the most promising of the "green shoots" detected by U.S. President Barack Obama and other optimistic assessments.

Other signs are far more positive for China's recovery. The Purchasing Managers' Index released Friday showed a slight majority, 52 percent of those surveyed, expected on the basis of their own orders that business activity was growing again and that Chinese manufacturing was gathering in March.

Sub-indexes for employment, imports and input prices all edged back above the 50 percent mark. A figure below 50 suggests the economy is shrinking; above 50 suggests growth.

"The April PMI indicates that the Chinese economy will keep recovering, a trend seen in the figures for investment, consumption and export growth in the first quarter," said Zhang Liqun, a researcher at the State Council's Development Research Center think tank.

Beijing's State Information Center reported Monday that it expects the economy to grow by 7 percent in the second quarter, boosted by an increase of 27.6 percent in investment in fixed assets such as factory and construction.

The report, carried in the state-controlled China Securities Journal, also carried the gloomier forecast that exports would fall in the second quarter despite overall economic growth, slipping 20.2 percent from a year earlier to $287.7 billion. The report also said it expects imports to fall even further -- by 25.5 percent to $225.6 billion.

So it is understandable that a lot of skepticism remains. Jing Ulrich, chairwoman of China equities for J.P. Morgan in Hong Kong, noted that while she is confident that China's economy is improving, "it appears sensible to guard against excessive optimism."

"Month-on-month and quarter-on-quarter improvements in economic indicators will be difficult to maintain, and the pathway to recovery will not be entirely smooth," Ulrich added.

Clearly, the massive $586 billion government stimulus package is having some effect. And that effect is being intensified dramatically by the massive new bank lending program ordered by the Beijing government. China's banks have obediently issued $673 billion in new loans in the first quarter of the year, 20 percent more than in all of 2007.

Between them, the bank lending and the government stimulus, which may have considerable overlap, represent a boost of more than 35 percent of China's GDP. With stimulants like that, it would be astonishing if China did not show signs of growth. But it is remarkable that the country's electricity output remains so depressed. The Chinese puzzle is not solved yet.