Don't Count Your Recoveries Before They're Hatched

Although both China's president, Hu Jintao, and its prime minister, Wen Jiabao, have issued confident statements in recent days saying the country is largely on track to resume growth of as much as 8 percent for 2009, there are ample reasons to warn that increasing calls to investors to buy into the China story are premature.

Goldman Sachs is just one of the international investment banks leading the China charge, upgrading its forecast on April 22 to say the economy would expand by 8.3 percent in 2009, higher than the government's forecast of 8 percent. CLSA Asia Pacific Markets, usually the voice of caution, also upgraded its estimate from 5.5 percent annual growth to 7 percent. Morgan Stanley upgraded as well at about the same time, from 5.5 percent to 7 percent for the year,

But the world should have received a wakeup call on April 23 – just a day after Goldman's rosy forecast – when the State Energy Regulatory Commission released statistics showing that power output for the first three weeks of April fell 4 percent year on year after a drop of 1 to 2 percent in March. Industrial production accounts for 70 percent of energy usage. China is reporting first-quarter industrial output growth figures of 8.3 percent. With energy usage so closely tied to industrial production it is very difficult to figure out how production could rise that fast while energy use is falling.

Another jolt came Monday, when the Shanghai government said gross domestic product growth for the province, China's richest, would fall to 3.1 percent, well below its 9 percent target. It is one of the rare times in memory that a provincial government reported lower growth than the central government itself. Despite Beijing's perennial warnings against the practice of fudging growth figures upward, provincial government leaders have traditionally based their chances for promotion on rosy GDP figures. The government has warned against the practice again and again, offering penalties against offenders. Nonetheless, in most past years, adding up provincial growth figures and comparing their aggregate to national GDP showed the provinces were running far in advance of the country as a whole, an indication that too often the figures were simply made up.

Certainly, the government in Beijing, which has never been fully comfortable with its restive people, has to be given full marks for reacting faster than any other country in the world to the financial crisis that began last year, with a massive US$585 billion stimulus program and loosened monetary policy that poured a river of money into banks, which extended Rmb2.7 trillion in new loans over the first two months of the year, much of which appears to have been poured into the stock market and kicking off government concerns that the market could become unstable. The Shanghai bourse became the world's second best performing market over the first quarter of the year before it sobered up in the last week.

But sector by sector, the sinews of the country's economy do not seem to be pulling together. Although earlier this year analysts were heartened by the flood of steel production raw materials and that de-stocking may be largely over, there appears little likelihood that production will recover before the third quarter at best. Steel output has been lackluster, rising by half a percent in March after 1.5 percent and 4 percent rises respectively in January and February, steel is of course an essential component in car production and construction, neither of which look particularly encouraging. Car sales, which soared in the first two months of the year, have dropped back as pent-up demand has been largely satisfied and as dealers have begun to cut back on incentive programs. Despite the fact that for the first time China surpassed the United States earlier this year to become the world's biggest vehicle market, government officials acknowledge that tax cuts and subsidies for rural buyers were temporary measures and that car sales will inevitably fall unless there is a strong recovery in the larger economy.


Nor are property sales in any better shape, particularly in the Pearl River Delta above Hong Kong, and are expected to recover very slowly. Months of falling home prices are expected, driving smaller developers to the wall as consumers wait it out for cheaper homes.

Rail freight volumes declined by 7.1 percent in March. Shipping remains off. China Shipping Container Lines earlier this month announced that 2008 unaudited net income had shrunk by more than 50 percent. As exports have continued their collapse on shrinking western economies, there appears little scope for optimism for the shipping industry. . .

Those figures are not just isolated ones. Earlier this month, the National Bureau of Statistics reported consumer confidence had fallen marginally, to 86.5 percent over January, the second-lowest level since the series began in 1991. There are indications that consumer confidence will continue to slump. March figures won't be released until the end of April, but retail sales growth has fallen from 23 percent to under 15 percent, a sign that consumers are tightening their belts in the wake of much slower income growth, which has fallen from about 15 to 20 percent in the cities to about 4 to 5 percent at best. Retailers say sales growth has been sustained in double digits only because of deep discounts, and when merchants inevitably are forced to end the discounts, sales will drop steeply.

Help from overseas doesn't look very promising either. The Canton Fair, the country's biggest attempt to lure buyers for its vast panoply of products on sale, saw visitors drop by 6.4 percent from the session held last October despite the fact that 800,000 invitations had been sent to overseas companies. North American and European buyers were particularly scarce, with Eurozone visitors down by 40.67 percent, according to the South China Morning Post, and North American ones off by 22.75 percent

Chinese investors are starting to get the picture, even if the international investment banks are locked into the bull case. Corporate performance has been dismal. According to the Information Data Center of China Securities News, by April 23 the 519 listed companies that filed first-quarter 2009 financial reports saw net income to parent companies down by an aggregate 21.5 percent year-on-year. It is difficult to see company performances suddenly turning around, except for industries that are plays on the worsening economy itself.

That isn't to say China will slip into reverse. The country's leaders, mindful that some 80,000 demonstrations took place across China involving police intervention, some of them pitched battles, have proven themselves willing and capable of bringing huge resources into play to preserve stability. There can be little doubt that if the US$585 billion in stimulus programs doesn't kick in, the government will do whatever it needs to do to bully the economy back to health. It has the resources with its US$1.9 trillion in reserves, unlike the United States and the Eurozone, with massive government debt.

But perhaps the most ominous figure of all is hamburgers. MacDonald's, the world's biggest fast-food company, said it is chopping the number of new outlets it will open in China this year from 175 to 150 as the economy slows. If the bulge bracket banks can understand anything, they ought to be able to understand hamburgers.