Industrial output in China rose 17.9%, continuing a pace which can almost certainly not be sustained. Production in the auto and telecom equipment sectors was especially strong. Retail sales also rose 18% in China, and loans rose over 17%,
"This is a confirmation that the economic measures taken so far have not really slowed down the economy at all," said DBS Bans senior economist Chris Leung in Hong Kong told MarketWatch.
The problem with the picture is that retail sales outside of food did not rise sharply. The central government is underwriting consumption by absorbing costs and not passing them on to the citizens. This, in turn, helps to build wealth, but it is wealth based on a sandy foundation. The government is, essentially making people money by absorbing their costs.
On the production front, a great deal of what is produced in China is exported, but much of the demand for goods is still within the country itself. If the government gets to the point where it cannot support consumer spending, production will have to drop. A recession in the West could drive down demand further. At that point, the Chinese growth machine begins to break down.
It is just a matter of time.
Douglas A. McIntyre
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