China leads the global economic recovery

China's economic recovery is now well under way, after a 6.8% fall in GDP in the first three months of the year.

China is “by far” the world’s “best-performing big economy” this year, says The Economist. GDP grew by 3.2% in the second quarter compared with a year before. A recovery is now well under way following a 6.8% fall in the first three months of the year. Economists treat China’s GDP statistics with justified scepticism, but “alternative indicators” such as coal consumption and traffic congestion tell a similar story.

The recovery is being led by manufacturers, says Jonathan Allum in The Blah! newsletter. Industrial production rose by 4.8% year-on-year in June, but retail sales undershot expectations, registering a 1.8% contraction. That makes this recovery dependent on selling products into world markets, not ideal at a time of weak global demand and a growing backlash against imports from overseas. “How much kit will Huawei [export] to the UK in the future?”

The GDP figures have been flattered by a “massive surge in metal-bashing for infrastructure projects”, agrees Ambrose Evans-Pritchard in The Daily Telegraph. Much of the funding is being channelled through “chronically inefficient state-owned enterprises” that don’t respond to market signals. China seems to be repeating the mistakes of its massive post-2008 stimulus, which saw vast amounts of ill-targeted infrastructure spending push the economy into a “debt trap”.

The Institute of International Finance’s Global Debt Monitor reports that total debt in China across households, governments and corporations started the year at just over 300% of GDP, but is now “fast approaching 335% of GDP”.

The backing of a one-party state means that China’s debt bubble is very unlikely to pop, writes Mike Bird in The Wall Street Journal. But that doesn’t mean it does no harm. Research shows that misallocation of capital – especially into the bloated housing sector – acts as a slow-burning drag on productivity. With GDP per capita of $10,262, China has miles to go before it catches up with advanced economies. Overinvestment in real estate won’t help.

Cooling the rally

The positive data has made it easier for the authorities to tout a “healthy bull market”. The CSI 300 is now up more than 12% for the year-to-date. Retail investors make up 80% of trading, so sentiment rules the roost. The surge has brought back “bad memories” from 2014-2015, says Craig Mellow in Barron’s. Domestic shares “more than doubled in seven months” before losing 40%. Yet regulators seem to have learnt their lesson, moving to tighten margin requirements to cool the euphoria. That means this rally may not have much further to run. But in the long-term Chinese markets could become less of a roller-coaster ride. 

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