Fears haunt China’s growth numbers

Business is roaring at Qiu Bangsheng’s factory in eastern China, where whizzing machines churn out long, white strips of polypropylene that are rolled into cylinders and turned into nappies and other hygiene products.

For Premier Li Keqiang and China’s top economic policymakers, who have been at pains to contain a downturn that is likely to be the worst in 25 years, stories like Qiu’s are exactly what they want to hear.

“Companies reported an improvement in business conditions in June and the property sector is warming up,” said a researcher at the National Development and Reform Commission, China’s powerful economic planner, who asked not to be identified.

“It seems that Premier Li is happy.”

The question is whether Qiu’s success shows the unexpected stabilisation in growth during the second quarter was a signal of an inflection point for the world’s second-largest economy, or merely reflects a government which remains wedded to hitting an arbitrary target that fails to address long-term imbalances.

Data last week showed China defying hard times to maintain a growth rate of 7% in the first six months, bang in line with Beijing’s full-year target.

Some economists have long been sceptical about China’s official data, although the country’s statistics bureau said last week its numbers were accurate and rejected suggestions they could be inflated.

Other analysts fear the figure, if not embellished, was masking crucial weaknesses. Growth in trade, investment, output and retail sales — mainstays of the economy— remained sluggish despite three interest rate cuts this year, they said, curtailed by a firm yuan and a still-wobbly housing sector.

“I’m not very optimistic about economic growth in the second half,” said Wang Jun, a senior economist at the China Centre for International Economic Exchanges.

Indeed, it was a boom in the financial industry that boosted services growth, momentum that is expected to have now fizzled on the back of a June stock market crash. Further policy easing and support may be needed to meet this year’s official target.

Qiu knows his firm’s success is due, in part, to central and local government support, including subsidies, and he notes smaller factories that are unable to upgrade are going out of business.

But while those smaller factories were not full of robots, they were full of workers. And with growth slowing noticeably over the past few years, the loss of low-end manufacturing jobs and resultant unemployment poses a risk to a sustained recovery.

Moreover, while China wants its manufacturers to move up the value chain, its economy may not yet be producing enough higher-skilled, higher paying jobs it needs to both replace those lost and tilt growth towards consumption.