China’s Economy Slows, Power Output Falls to Four-Month Low but Premier Upbeat on Economy; Enormous Headwinds

A rally in Asia is underway this morning as Wen Jiabao, China’s premier is upbeat on China’s economy

Wen Jiabao, China’s premier, has given his most optimistic assessment of the Chinese economy since the start of the year, saying that it had stabilised and that the government’s target of 7.5 per cent annual growth was well within reach.

Mr Wen’s comments, published in a statement on the government’s main website on Wednesday, came a day before China releases its third-quarter GDP data. The data are widely expected to show growth slowing from the 7.6 per cent recorded in the second quarter and marking the country’s seventh straight quarterly slowdown.

Before previous data releases this year Mr Wen warned that the Chinese economy faced “downward pressure” because of the lingering impact of the global financial crisis.

But in the comments released on Wednesday he struck a more upbeat tone: “The economy in the third quarter was quite good. We can now say with confidence that the growth of the Chinese economy is basically stabilising . . . As policies are implemented and hit their mark, the Chinese economy will stabilise further.”

He added that he was sure the economy would achieve the government’s full-year target of 7.5 per cent growth.

Power Output Drops As Growth Slows 7th Quarter

Bloomberg reported China Power Output Falls to Four-Month Low Amid Slowing Economy

China’s power output in September fell to the lowest level in four months as economic growth slowed for a seventh quarter.

Electricity production was 391 billion kilowatt-hours, the least since 390 billion in May, data from the National Bureau of Statistics showed today in Beijing. The figure was down 11 percent from August and up 1.5 percent from a year ago, according to the data.

The world’s second-biggest economy expanded 7.4 percent from a year earlier in the three months ended September, the statistics bureau also said today.

Enormous Headwinds

China has massive property bubbles, an infrastructure building bubble, and is overly committed on exports with the EU in a massive recession and the US in recession as well (at least by my estimation, slowing by other estimates).

Moreover, numerous shadow-banking and ponzi loan schemes have collapsed this year. Worse yet, the bubble-busting collapse of shadow-banking schemes is likely just getting started.

In response, China has announced various infrastructure stimulus measures, but all that does is prolong the inevitable collapse in the unsustainable infrastructure-building model.

Infrastructure building in China is already at the point of malinvestment. The projects will never be economically viable.

China's move to a consumption model away from exports and fixed investment is going to be painful. The collapse of shadow banking and the breakup of state-owned-enterprises will be key issues in the coming decade.

Power Struggle of a Different Order

Yet, China can stimulate for a while just as the US can and did (increasing headaches down the road), but do not expect much more with a major regime change coming up.

Please consider the New York Times article In China, a Power Struggle of a Different Order.

As the Communist Party in China prepares for a once-in-a-decade leadership transition next month, it is also planning to take a giant step — to break up the monopolies enjoyed by its gargantuan state-owned enterprises.

Prime Minister Wen Jiabao vowed in a speech this year that Beijing would pursue breaking up state monopolies. “We must move ahead with reform of the railway, power and other industries,” Mr. Wen said, “complete and implement policies and measures aimed at promoting the development of the nonstate economy, break monopolies and lower industry thresholds for new entrants.”

All signs indicate that the next leaders of China — Xi Jinping is widely expected to replace Hu Jintao as president and Li Keqiang is poised to succeed Mr. Wen as prime minister — will stick to that script. Critics say that the sheer size and market dominance of state-owned enterprises creates a drag on the Chinese economy, with vast opportunities for corruption and waste and higher costs for consumers.

Once the new party leadership is in place, it will be under enormous pressure to break the grip of inefficient state companies and to reinvigorate China’s three-decade economic miracle. But there is a deep division within the party on such economic policies.

The increasingly powerful state-owned companies are a monster of the party’s own creation. After languishing through the 1990s, China’s state sector came roaring back over the past decade to take control of vast swaths of the economy.

Today, state companies and affiliated businesses account for more than half of China’s economic output and employment. Of the 70 companies in mainland China that are on the 2012 Fortune Global 500 list , 65 are state-owned.

The NYT article is well worth a read in entirety. It discusses many of the issues and battles raised long ago by Michael Pettis at China Financial Markets.

Huge Battle Brewing

Pettis has been on top of the SOE issue for quite a long time. Here are a few more links worth reviewing regarding the battle looming over the SOE breakup as well as future expected growth of China.

• World Bank Warns of Economic Crisis in China; Only 3% Growth for Decade Says Michael Pettis
 
• Long-Term Outlook for China, Europe, and the World
 
• 12 Predictions by Michael Pettis on China; Non-Food Commodity Prices Will Collapse Over Next Three to Four Years; Nails in the Hard Landing Coffin?

Whether or not China meets its full-year (revised lower) target is essentially irrelevant. What happens over the next few years is what matters. And on that score I think China bulls will be shocked how anemic Chinese growth will be.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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