All Systems Go In China?

The number of pieces of data that point to a strong recovery in the Chinese economy rises every day. The Purchasing Managers Index rose to 54.0 for August, up from 53.3 in July. A number above 50.0 signals an expansion in the sector.

China’s export figures have begun to improve and the central government expects GDP growth in the second half to be above 8%.

The stock markets in China do not agree with the conventional wisdom about the economy, especially as it is being articulated by the government. The Shanghai Composite fell about 20% last month. There have been no signs in the last week, as positive economic information has reached the market, that the stock index will improve.

Skeptics has several reasons to think the improvements in the Chinese economy may be short-lived. The first is that major Western economies and the economy in Japan may be showing modest GDP improvement, but unemployment is still rising and consumer spending remains moribund. The critical drivers of China’s export economy have not recovered.

Another reason for concern about China’s expansion is that it maybe based very heavily on the nation’s $585 billion stimulus package which has put liquidity into the market to improve consumer access to capital and to sharply increase the number of projects to improve the country’s infrastructure. Once the $585 billion has been spent, there is some chance that economic growth will disappear with it.

China’s recovery is build on sand, and investors in the stock market there know it.

Douglas A. McIntyre