Mother Of All Chinese Recoveries

For the 3rd month in a row Chinese manufacturing PMI surprises to the upside, with new orders marching on and low finished goods inventory there are good prospects for manufacturing expansion ahead. Liquidity drives every bear out of caves now.

The strategists at CLSA Asia-Pacific Markets had pretty nice charts more than a week ago on what drives China with a following explanation:

INVESTMENT remains the most important driver of China.s GDP growth, in part because the Communist Party decided that it could afford to undertake a massive build-out of public infrastructure, which is intended to boost productivity and reduce income inequality . . . and encourage citizens to like the Party. During the first nine months of this year, investment accounted for 58.8% of GDP growth, or 6.3ppts of 10.6% YoY growth. In 2009, investment, boosted by a huge stimulus program, accounted for 95.2% of GDP growth, or 8.7ppts of 9.1% YoY growth. During the period 2006-08, prior to the stimulus, investment accounted for 43-48% of growth.



FINAL CONSUMPTION accounted for 34.4% of GDP growth in the first three quarters of this year, or 3.6ppts of 10.6% YoY growth. This is the smallest consumption share of growth since 1994, despite 18% nominal retail sales growth this year, because investment continued to rise strongly off of a large base. Last year, final consumption (of which, about 27% is government consumption) accounted for 45.4% of GDP growth, or 4.1ppts of 9.1% YoY growth. Prior to the stimulus, the consumption share of growth had risen from 39% in 2007 to 45% in 2009.


NET EXPORTS are the least important driver of China.s economy, contributing 6.8% of growth so far this year, or 0.7ppts of 10.6% YoY GDP growth. Last year, the collapse in global demand left net exports delivering a huge negative drag on growth, with a -40.6% contribution, or -3.7ppts of 9.1% YoY GDP growth. From 2001, when China joined the WTO, through 2008, the average annual net export contribution to GDP growth was 10.3%. This year and in 2011, we forecast a zero contribution to full year growth.

Click on charts to enlarge, courtesy of CLSA Asia-Pacific Markets.

While net exports are playing a minor role for the growth now, export industries employ very substantial part of workforce ...