Chinese economic data has been impressive lately for two reasons.
One is that overall, emerging markets have been getting slapped pretty hard lately, and China is standing out to the upside.
The other reason is that just a few months ago, there was tons of chatter about a “hard landing” or at least the immediate need to rebalance the Chinese economy. And yet the hard landing, for now, is off.
That being said, one of the whole reasons people are talking about a need to rebalance the economy is the perceived massive overcapacity and slack in the economy (thanks to tons of investment-led growth post-crisis). This has created a situation of collapsing producer profits, lots of unused infrastructure, and a need to let the demand side catch up.
Well, what everyone’s talking about is the fact that the new batch of economic data suggests that we’re back to investment-led growth, and adding more infrastructure where it is unneeded.
From Morgan Stanley:
Growth outlook and policy implications: The more pro-growth policy stance since late June helped the notable rebound in growth momentum on last year’s low base. In particular, allocating/mobilizing unused fiscal funds has likely expedited infrastructure investment projects. Meanwhile, the moderate PBOC liquidity injection on the short end combined with fiscal deposit auction has offered some temporary relief to tightening financial conditions. Whether this growth acceleration is sustainable largely depends on the intensity of further growth-stabilizing policy measures. In our view, the economy will still face headwinds from the ongoing deleveraging process, though counter-cyclical policy easing could alleviate the pain during the structural change. On the policy front, more signs of activity growth stabilisation would likely lower the possibility of any potential high-profile easing measures, such as a RRR cut or interest rate cut, though benign CPI inflation has left abundant room for further policy easing.
SocGen also raised concerns about the numbers:
China’s industrial production growth delivered another massive upside surprise in August, surging to a 16-month high of 10.4% yoy. The significant acceleration in infrastructure investment was clearly the major push. Although this set of data puts clear upward pressure on our short-term forecast, the dominating role of infrastructure played in the sudden turn-around confirms our concern over the sustainability. Industrial production grew 10.4% yoy in August, accelerating further from the surprisingly strong 9.7% yoy in July and besting street expectations (Cons. & SG 9.9%). By industry, nonferrous metal and utility were the major contributors to the headline improvement. Steel production increased 15.6% yoy, up from 10.9% yoy in July; and power generation rose 13.4% yoy, compared with 8.1% yoy in July.
So, yes, recovery, but possibly at the expense of a much-needed rebalancing, and perhaps setting up the economy for a harder landing down the road.
For more on this, see Kate Mackenzie at FT.