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Tug of war as China exports slump, investment jumps

Chinese exports fell more steeply than expected in April but investment spending surged as massive government pump-priming and buoyant bank lending helped to cushion the slump in global demand.

How these opposing forces play out in coming months will determine whether the world's third-largest economy recovers quickly enough to achieve Beijing's goal of 8% growth in gross domestic product this year.

“The future of the world economy remains uncertain, and it's really hard to be optimistic about China's trade prospects,” said Qi Jingmei, an economist with the State Information Center, a government think-tank in Beijing.

Qi was speaking after a 22.6% fall in exports last month from a year earlier. That was steeper than March's 17.1% decline and greater than the 18% drop that economists had expected.

But others said the figures were still clouded by the schedule of factory closures around the Lunar New Year back in January. Goldman Sachs said this had artificially boosted March production and exports, leading to a correction in April.

“While the current underlying exports growth momentum remains weak, we believe the worst period of the exports slowdown is probably behind us,” economists Yu Song and Helen Qiao said in a report.

Merrill Lynch said the deterioration in exports showed that the foundation of China's recovery was still not firm - a point emphasized recently by the People's Bank of China.

But economists Ting Lu and TJ Bond said they remained confident that China would hit its 8% growth target thanks to the impetus from the government's 4 trillion yuan ($585 billion) stimulus plan and a surge in bank lending.

That torrent of money has allowed China to break ground on scores of infrastructure projects this year, from new subways to airports, driving the annual pace of fixed-asset investment growth in urban areas to 30.5% in the first four months.

The government publishes only year-to-date investment data, but Goldman Sachs calculated the rise in April alone at 33.9%, up from an estimated 30.3% in March, and well above market expectations.

A leap in capital spending in transport, primary industries and projects backed by the central government suggested that Beijing is succeeding in cushioning a collapse in global demand.

“The accumulated growth momentum in fixed asset investment is really astonishing,” said Dong Xian'an, chief economist at Southwest Securities in Beijing.

Reinforcing the case that public investment is now the main pillar for growth, the one-time engine of exports sputtered in April. China's trade surplus of $13.1 billion was its lowest for a non-holiday month in more than two years.

“Exports are likely to drop further in the near term as economic indicators in the United States and Europe, such as industrial output and retail sales, are not looking up,” said Wang Xiaohui, an analyst at Sinolink Securities in Shanghai.

After adjusting for the number of working days, the customs office said China exported 6.9% more in April than in March. But several analysts disputed that, saying the month-on-month pace was disappointing, nearer a 2.0% drop.

Qi of the State Information Center also pointed to a 23% year-on-year drop in imports in April as evidence that private companies remained reluctant to invest after a 25.1% drop in March.

Nevertheless, recent figures from some of China's trading partners have indicated that the worst of a brutal contraction in export and import flows triggered by the global financial crisis may be over.

Firms that are geared toward Beijing's stimulus plans have profited nicely. US construction equipment maker Caterpillar said sales of hydraulic excavators in China rebounded to near-record levels in April after falling to near zero last year.

And producers of raw materials have also benefited, with China's iron ore and copper imports both at record highs in April, though much of the demand may reflect stockpiling, rather than industrial production.

Saul Eslake, chief economist at ANZ Bank in Melbourne, said April's data underscored how domestic factors are more important than external demand in putting China's economy back on track.

“The recovery is being driven primarily by domestic demand and policy measures that have driven domestic demand,” he said. “It would be hard for China to recover by exports alone, in advance of a significant turn-up in the markets of its major trading partners.”

In a tentative sign that government spending is encouraging business activity more broadly, investment growth in real estate increased modestly in the first four months of the year.

Housing prices rose 0.4% month-on-month in April, feeding into confidence that a two-year downturn in the property market, a bellwether of China's private sector economy, is ending. (Reuters)