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China could be stabilising as stimulus efforts pay off

It is too early to sound the all-clear. After all, we haven’t yet heard the fat lady sing. She hasn’t even begun to mount her rostrum (if indeed she has one).

So you could reasonably accuse me of being premature. But it is beginning to look as though the Chinese economy has stabilised and may even be about to turn up.

This is particularly noteworthy given that this week the IMF again sounded the alarm about the weak state of the world economy. Of course, there is a lot in the world that continues to be very worrying. Yet, compared to a few months ago, quite a few things are starting to look a bit better.

As so often, the IMF’s prognostications were heavily influenced by the conventional wisdom of several weeks back. They need to be taken with the proverbial barrel of salt. You will remember that last summer the Chinese stock market fell by 40pc.

This led to widespread fears of a global slowdown. These fears resurfaced several times over subsequent months and any official statistics which appeared to suggest softness in the Chinese economy caused waves of panic among western investors.

As I argued at the time, it was misguided to pay so much attention to the Chinese stock market. Although its fall last summer was precipitous, the market had earlier risen very sharply. Indeed, Chinese stock prices are still 50pc higher than two years ago. Moreover, since shares are owned only by roughly 3pc of Chinese people, it was always implausible that weakness in the Chinese stock market would harm consumer confidence and weaken domestic demand.

Of course, some said weak stock prices might be reflecting a general malaise in the economy. But this was, if anything, more implausible for China than for other industrial countries, where the record of the stock market as a forecaster of the real economy is pretty bad.

Mind you, there were plenty of things to worry about in the Chinese economy – and there still are. The share of investment in GDP is much too high and, correspondingly, the share of consumption is much too low. Much of this investment is wasted.

Accordingly, many of the financial system’s assets are decidedly dodgy. Moreover, although China’s current account surplus has fallen, it is still running at about 3pc of GDP, which does not make sense for a country at China’s stage of development.

Over and above these structural problems, but not because of them, China’s rate of economic growth has been slowing markedly for some time. Nine years ago the economy was growing by 14pc. Subsequently, the growth rate subsided to less than half that.\

In itself, this was nothing to worry about. Such a slowdown is perfectly normal for countries undergoing rapid development from a previously retarded state. But many observers conflated this slowdown in the sustainable growth rate with a shortage of aggregate demand and an imminent recession. The danger of misinterpretation was exacerbated by the unreliability of the official figures.

Hardly anyone believes them – and with good reason. At the time of the stock market panic, there was a widespread belief that the underlying economic reality was a good deal weaker than the official figures suggested. Since the Chinese economy is structurally severely unbalanced, for ages many commentators have anticipated, not just a slowdown, but a crash.

At times, all these elements have come together to suggest that there was about to be a disaster in China that would spill over into rest of the world. This seemed to fit in very well with the (until recently) acute weakness of many commodity prices, including oil.

Last September, the Fed held back from raising US interest rates partly because of China-related fears about the world economy. And after it finally did raise them in December, many argued that it had made a mistake, partly for China-related reasons.

So this week’s data on the Chinese economy were more than usually significant. True, the growth rate in Q1 edged down somewhat from Q4 of last year and some commentators seized on this data as further confirmation of a slowdown. But the slight fall in GDP growth was fully expected.

More significantly, monthly data for March showed strong growth of production and sales, well above market expectations. Industrial production was up over the year by 6.8pc (a nine- month high) while retail sales were up by 10.5pc. No one doubts that the growth of the Chinese economy is a good deal weaker than the official figure of 6.7pc. The measure of economic activity that we at Capital Economics have developed as an alternative to the official GDP figures, our China Activity Proxy (CAP), suggests that the economy is growing by about 4pc.

But, interestingly, the CAP suggests that China’s economy underwent a sharp slowdown at the start of 2015 and has since largely stabilised. Moreover, there are some tentative signs that the growth rate may be about to pick up. This would not be surprising, given stimulatory monetary and fiscal policy.

The growth of broad credit has accelerated to a 20-month high. Admittedly, the March data – and indeed all recent data from China – need to be interpreted especially carefully because of seasonal distortions arising from the different timing of the Chinese new year.

Not until April’s data are released next month will we have an undistorted picture of what has been going on. But if at that point the data confirm the story I have outlined here, then we would have the beginnings of some good news about the state of the world economy.

The commodity markets already seem to be anticipating just such an outcome.