Tuesday, May 26, 2009

Uncertainty Surrounds China’s Efforts to Pull from Its Economic Downturn

Sources: Reuters, China Cheerleading Gives Way to Caution on Economy; Forbes.com, China Shares Fall As Data Raises Recovery Doubts

Troubling signs have raised doubts as to whether recovery is on the horizon for China's economy. Chinese shares fell 0.9% on May 14, retreating from a nine-month high, in light of unfavorable U.S. economic data. Low retail sales in the U.S. have weakened investor confidence in China’s economy. The annual domestic product growth also dropped in the first quarter, slowing from 6.8 percent in the last three months of 2008 to 6.1 percent.

Falling exports and weak industrial output growth in April diminished news of increased retail sales and investment. While the figures generally suggest economic renewal, many investors are concerned that the government will wait to assist weaker areas.

China’s industrial output growth may rise to the double digits in the second half of 2008 from the single digits where it has been since October. However, rebound is not certain. We must arrive at the conclusion that the Chinese economy has reached its bottommost point cautiously. To the extent that quarter-on-quarter growth had ceased to slow down, the economy may reasonably be said to have bottomed out.

While Premier Wen Jiabao has continuously voted for confidence in the Chinese economy, Vice Premier Li Kequiang was hesitant to say last Thursday whether the country is headed for economic recovery, though the 4 trillion yuan ($585 billion) stimulus plan had produced initial results. Li said, “There are still huge uncertainties, and the process of economic recovery may be tortuous and complicated.”

Discussion Questions:

1) What steps might China take to strengthen investor confidence while U.S. spending figures remain low?
2) How does doubt about China’s economy translate into doubt about other world economies?

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