China Economy to Rebound as Stimulus Spurs Investment

By Kevin Hamlin

April 17 (Bloomberg) -- China’s economy, the world’s third largest, may rebound this quarter as Premier When Jiabao’s 4 trillion yuan ($585 billion) stimulus package cushions the effects of the global recession.

Urban fixed-asset investment surged by almost a third in March and industrial-output growth accelerated, reports accompanying China’s gross domestic product figures showed yesterday. First-quarter GDP grew 6.1 percent, the slowest pace in almost a decade, as exports slumped.

“The economy has gained significant momentum since February,” said Sun Mingchun, an economist at Nomura Holdings Inc. in Hong Kong, who predicts the economy will expand 8 percent this year. “We still expect a V-shaped recovery.”

A pickup in China will contribute “strongly” to growth in the rest of Asia by increasing demand for commodities and products from around the region, according to the World Bank. Wen has cautioned that while the economy is in better-than- expected shape, China is yet to establish a solid foundation for a recovery.

“China has bounced and I think it’s very important,” Barclays Plc President Robert Diamond said in an interview yesterday in New York. “The impact that that can have, if we’re right and we see this continuation in stronger Asian countries, is pretty phenomenal.”

UBS AG yesterday raised its estimate for economic growth this year to as much as 7.5 percent from 6.5 percent previously and Royal Bank of Scotland increased its estimate to 7 percent from 5 percent. Merrill Lynch expects second-quarter growth of 7.2 percent, climbing to 8 percent for 2009.

Newman’s Optimism

“China got its stimulus plan started months ahead of the U.S. and it’s really working,” said Frank Newman, chairman of Shenzhen Development Bank, who served as a deputy secretary at the U.S. Treasury from 1994 to 1995. “We see a lot of it in action because we are financing it.”

Economists have been increasing their forecasts since February. The median estimate of 15 surveyed by Bloomberg News before the release of yesterday’s data was for 7.7 percent growth this year, up from 7.2 percent in February.

Nissan Motor Co. said its sales of passenger cars in China rose 36 percent in March from a year earlier as stimulus measures boosted confidence and attracted more buyers into showrooms. Anhui Conch Cement Co., China’s biggest maker of the building material, said this month that sales volume jumped 15 percent in the first quarter from a year earlier.

Wen’s Target

The government has targeted 8 percent economic growth for the year, a level deemed necessary to create enough jobs for its growing population.

The closure of thousands of factories has cost the jobs of millions of migrant workers, raising the risk of social unrest as China approaches the anniversary of the anti-government protests and crackdown in Tiananmen Square in June 1989.

While stimulus measures have started to produce results, China faces faltering export demand, industrial overcapacity, unemployment and weak private investment sentiment, Wen said yesterday. A rebound in industrial-output growth lacks momentum, the premier said.

“Growth may have bottomed out in the first quarter but with private sector and overseas demand still weak, China will not emerge from this downturn as rapidly as it went in,” said Mark Williams, an economist with Capital Economics Ltd. in London.

Profits Decline

Profits earned by industrial companies fell 37 percent in the first two months of the year. Those earnings contributed four times as much to investment as bank lending and government spending combined last year, according to Williams.

“It seems wishful thinking to conclude, as many are, that China is on the cusp of a rapid rebound,” he said.

China’s expansion contrasts with recessions around the world. The Organization for Economic Cooperation and Development predicts 6.3 percent growth for China this year, compared with a 4 percent contraction in the U.S. and a 6.6 percent decline in Japan.

Wen’s stimulus, plus a decision by the central bank to remove lending caps in November, helped new loans jump more than six times to 1.89 trillion yuan in March from a year earlier. The value of new investment projects started in the first quarter increased by 87 percent.

“March activity reports and bank-loan data show that the economy is gaining speed heading into the current quarter,” said Frank Gong, head of China research at JPMorgan Chase & Co. in Hong Kong. “Fixed investment is accelerating as major infrastructure projects break ground.”

To contact the reporter on this story: Kevin Hamlin in Beijing on khamlin@bloomberg.net;