One of the hoped-for indicators of a global economic recovery is now looking more credible. Chinese manufacturing has picked up, partly thanks to a big economic stimulus and partly to a groggy global market slowly starting to order again.
China’s numbers are looking healthier. The benchmark Purchasing Manager’s Index climbed to 56.6, up from its all time low of 38.8 in November 2008, and up from 55.2 in November 2009. (Above 50 means the index is growing.) Chinese manufacturing has been acting true to type. The boost in manufacturing is based on subsidies to consumer goods purchasers and rebates to exporters. Exports are still down, but the rate of reduction is its lowest since the November 2008 crash.
China did a phased Keynesian stimulus package of $1.3 trillion in 2009, dwarfing most Western stimulus packages. This wasn’t, however, an purely “command economy” response. It was very necessary. The crash couldn’t have happened at a worse time for China. The current 5 year plan requires a big boost in the domestic economy, a move based on the concept of creating a bigger, more durable domestic market. That’s necessary to reduce China’s dependence on exports, and to create the capital base inside China to fund further growth.
Exports have been funding China’s development to date, but the crash exposed some serious weaknesses. The huge capital intake involved in redeveloping and modernizing the nation dried up overnight. This has if anything highlighted the need for a strong local economy.
The various subsidies and rebates are a classic approach to the problem. China has been reworking its foreign investment rules and other incentives on a needs basis for the last decade, tailoring the schematics of doing business in China. The trillion dollar stimulus has been a staged, targeted capital injection direct into the economy’s major earners.
China’s Commerce Minister has said that the export rebates will remain in place in 2010. China has also refused to upvalue its currency, despite years of pressure from the US and others. That’s had a positive impact on Chinese manufacturers, who operate on extremely tight margins, and need to maximize the domestic value of export earnings. It’s also very much in line with Chinese industry’s tough production criteria, where nothing happens unless profits are locked in. Entire production lines went into suspended animation at the worst of the crash. The fact that the PMI is rising is therefore a plausible indicator of a recovery.
China’s economy, despite the crash, has still been growing in the 8% band over the hiatus period. That’s well down on the huge rates of the past, but does indicate that the domestic economy has taken up at least some of the slack, in the absence of US orders, which are barely being mentioned, and rarely enthusiastically, in US trade figures. Regional markets would also be contributors, with countries like India, Australia and the Asian economies still functional as trading partners.
China is expected to take over from Japan as the world’s second largest economy in the coming year.