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V for victory

Just as Goldman Sachs was seen as providing a ray of light for Wall Street, optimists are busy touting China as a spot of cheer in a recessionary world. Sure, the world’s third-biggest economy unveiled a further slowing in economic growth, to 6.1 per cent in the first quarter over the year-ago period. But that marks a stabilisation of sorts, with the deceleration in annual growth rates falling sharply. Better still was a slew of perky March data. Ecstatic analysts spent Thursday pencilling in V-shaped graphs.

Some hope is justified. Beijing’s willingness and ability to spend its way out of the slowdown is clear – urban fixed asset investment increased by 30 per cent, year-on-year, in March.

Banks, under government orders, are furiously extending loans. M2 money supply is growing at a record clip. Lending is also up 30 per cent. And fiscal spending has a better record in China than, say, Japan. The World Bank reckons that the country’s $100bn fiscal stimulus of 1998-2002, worth 8 per cent of 1998 gross domestic product, prompted four times as much in other government-influenced investment.

That investment, however, was largely targeted at infrastructure bottlenecks. Discipline looks more ragged this time around. Spending on housing, for example, does not tally with continued weakness in the real estate sector; nor with recent forecasts by a government think-tank that Chinese house prices will halve over the next two years.

Rapidly rising bank lending inevitably creates more dud loans. With new loans to date at almost the same level as for all of 2008, it could also set the stage for a sudden pull-back.

Beijing, whose early tightening policies helped precipitate the economic slowdown, has a penchant for playing with the accelerator. Meanwhile, the outside world’s hope that a spillover of Chinese demand could help lift the global economy has yet to materialise. Komatsu, one of the biggest heavy machinery makers, saw Chinese unit sales fall 28 per cent year-on-year in March. Any V-shaped recovery will come with firmly Chinese characteristics.

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