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Chinese Economy First on its Feet

If there is to be a quick economic recovery of any kind, it appears that China’s economy will be the first on its feet. Furthermore, continued Chinese foreign investments reveals that country’s shrewdness at this turning point in the global economy.

As the US and the west in general goes to the printing press and sells debt to finance stimulus packages, China invests in ever larger acquisitions overseas. China has long been scouring the globe in search of investments in energy and resources to keep its behemoth economy chugging ahead.  According to the New York Times, “The deal by Sinopec, the largest Chinese oil refiner, to buy the Swiss oil explorer Addax for $7.24 billion last month was China’s largest overseas acquisition yet.”

“Despite short-term anxieties, Chinese Outbound Foreign Direct Investment (O.F.D.I.) is poised to grow markedly in the medium and long term, and the importance of these investments to Chinese firms is changing fundamentally as the nation confronts the need to rebalance its growth model,” Mr. Rosen wrote in a paper whose co-author was Thilo Hanemann.

With domestic economies of scale largely exhausted, companies will have a powerful incentive to move abroad to upgrade their manufacturing and compete in more profitable areas like distribution, design and branding. “Made in China” will increasingly give way to “Made by China — abroad,” Mr. Rosen and Mr. Hanemann argued.

The point is underscored by the increasing awareness domestically and abroad that production of energy has more or less reached a plateau, and that much of the low hanging fruit in the resource sector, too, has been depleted. As such, China’s foreign acquisitions reveal that the Middle Kingdom wishes to control not only the means of production at home, but also abroad.

In a surprising development last week, China reported that its gross domestic product expanded 7.9 per cent in the second quarter from a year earlier after a 6.1 per cent gain in the previous three months. That was more than the 7.8 per cent median estimate of 20 economists surveyed by Bloomberg News.

Chinese growth continues to fuel confidence and growth markets around the world, particularly China’s biggest supplier of iron ore, Australia. Iron ore imports into China jumped 29 percent in the first half of 2009 as mills expanded output. Cash prices for iron ore delivered to China climbed above $90 a tonneas growth in the Asian country and second largest economy in the world rebounded and drove production and imports higher.

This bodes well for the resource sector in the short term, though there is perhaps some risk of new bubbles forming not only in the Chinese economy, but also in the US and Canada.

To achieve this growth, China has had to stimulate its economy, too. In June, Chinese banks made RMB1.53trn (US$224bn) in new loans – five times more than the same time last year.Chinese money supply grew by a record and inflows of cash pushed foreign-exchange reserves to more than $US2 trillion.

All this is good, but if history serves, runaway credit growth leads to excessive bad loans, asset price bubbles and high inflation. America is all too familiar with this story, and as its author in 2007 was partly to blame for the economic mess it remains mired in today. According to one report up to 20% of new lending is going into the stock market, which could lead to unrealistically inflated share prices.

In the meantime, Chinese consumer prices fell by 1.7 percent in the year to June with spare capacity at home and abroad keeping prices down.

Nevertheless, ”China’s recovery is on track and growth may accelerate to near 9 per cent in the third quarter and 10 per cent in the fourth quarter,” said Lu Ting, an economist at Bank of America-Merrill Lynch in Hong Kong. ”The government won’t tighten policies too early but it should tell banks not to lend without limit.’