China's Recovery Mirage

China’s Purchasing Managers’ Index was up for the fourth month in a row, moving to 53.2 from 53.1 in May. The numbers were issued by the the Federation of Logistics and Purchasing.

The figure probably does not mean much for those looking for a real and not artificial economic recovery in the world’s most populous nation. The improvement is almost certainly fueled entirely by the Chinese $585 billion stimulus package which is putting enough liquidity into the economy to improve consumer spending and finance the build-out of huge infrastructure projects.

The question for China now is what happens when the government money runs out? Some of China’s own economists believe that the current side effect of government spending will cause the GDP of the country to slow as soon as stimulus money is no longer available.

The most important concern about how stimulus money is being utilized is that it is going into speculative investments including stocks and real estate and infrastructure programs that have no ongoing use for the country. Roads and bridges are useful if they expand access to parts of the country which are underserved by transportation, but building a road for the sake of providing jobs and buying concrete from Chinese manufacturers is hardly sustainable.

China faces the fact that even if the economies in the US, UK, and EU recover, consumers in those regions could continue to curtail spending for years as they pay down the trillions of dollars in leverage that they took on during the real estate boom and save money for retirement funds that have been decimated by a drop in the stock markets. Chinese exports may not stage a real recovery until the nation’s stimulus money has been long spent.

China will need to decide, and perhaps decide soon, whether it will want to put up another several hundred billion dollars to drive GDP or see its economy slow as it did late last year.

Douglas A. McIntyre