China’s Economy Takes a Sharp Domestic Turn

June 12, 2009

By KEITH BRADSHER
HONG KONG — Since China entered the World Trade Organization in November 2001, a rising tide of exports, combined with a torrent of investment, has lifted the country’s economy ever higher, while consumer spending has lagged.

But now, the Chinese economy relies increasingly on growth at home, as data released Thursday made clear. A decline in exports has become a serious drag on growth, while government spending has led domestic investments higher at a remarkable pace and consumer spending appears to have been fairly strong as well.

Some economists wonder whether China is actually becoming too reliant on investment spending and whether the government’s economic stimulus program may be making this worse.

“For China’s nascent economic recovery to be sustainable beyond the short term, policy makers must take steps to ensure that consumption remains on a firm growth trajectory and that the investment boom does not exacerbate the economy’s structural imbalances,” the chairwoman of China equities at JPMorgan, Jing Ulrich, said in a research note.

Chinese exports plunged by a record 26.4 percent in May from a year earlier, the Chinese customs agency announced Thursday, as buyers in industrialized countries remained cautious about placing orders.

But investments in fixed assets like roads, factories and apartment buildings set a record in the opposite direction.

Chinese investment expenditures rose 32.9 percent in the first five months of this year, compared with the investments in the period last year, the National Bureau of Statistics announced in Beijing.

Yu Song, a Goldman Sachs economist, calculated that after adjusting for inflation, Chinese investment spending had grown in May at a breakneck pace, rising close to 50 percent from May of last year.

The government’s stimulus program is powering much of that increase, with spending on railroads soaring 110.9 percent in the first five months of 2009, compared with the same period last year.

The Chinese media reported that retail sales in May, scheduled to be announced Friday morning, are likely to show an increase of 15.2 percent. That would represent a modest acceleration from April, when the increase from a year earlier was 14.8 percent, and a robust gain when adjusted for the gradual decline in overall prices in China.

The Chinese government has struggled to keep economic data secret, and leaks to the media have frequently been right.

One of the biggest supports for retail sales in China has been the auto market, with car sales rising briskly as the government has offered various subsidies, especially in rural areas.

The big question for China is how long the economy can stay strong without the support of vigorous exports. Wages and profits have slipped in export-oriented coastal zones of China, limiting the spending power of consumers.

Chinese imports fell a little more slowly than exports last month, dropping 25.2 percent from the period a year earlier. The Chinese trade surplus last month was $13.39 billion, compared with $13.14 billion in April and $16.37 billion a year ago.