Upswing In China's Economy May Be Temporary

Sep 25, 2013

Manufacturing in China is at a six-month high, but many economists think this growth could be driven by government policy rather than by real demand.

“Modest growth is what you’re seeing,” NPR’s Shanghai correspondent Frank Langfitt told Here & Now.

Manufacturing exports are down, meaning that the demand is not coming from the U.S. or Europe, but from domestic sources, Langfitt said. And economists are seeing an increase in electricity consumption and rail freight, but that may not last, he said.

“You know, a number of economists here think that a fair bit of this is driven by government policy, not real demand,” Langfitt said. “What the government is trying to do — and it’s done this in the past — is try to keep the economy moving. But this is small stuff when you think about the huge challenges that China faces now, economically, in the coming years. And that is kind of what is coming up next.”


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From NPR and WBUR Boston, I'm Jeremy Hobson. It's HERE AND NOW.

A measure of manufacturing in China hit a six-month high this week, which was a surprise because for much of this year, China's growth has been slowing down. What happens in the world's second-largest economy matters all around the world, but especially to the world's largest economy. That would be us. So let's find out more about what's going on from NPR's Frank Langfitt in Shanghai.

And, Frank, why the uptick in manufacturing?

FRANK LANGFITT, BYLINE: Well, it's modest growth is what you're seeing. And it's interesting, because if you look at manufacturing exports, they're actually down. So the demand isn't coming from the U.S. or Europe. It's really more domestic. And it's also - you're seeing increases in other sort of pretty important indicators, like electricity consumption and rail freight. That's, so far, the good news.

HOBSON: And what is the bad news?

LANGFITT: Well, it may not last. You know, the economists - a number of economists here think that a fair bit of it is driven by government policy, not real demand. The government has put an extra $6 billion into rail expansion and cutting taxes on small companies. So what the government's trying to do - and it's done this in the past - is try to keep the economy moving. But this is small stuff when you think about one of the huge challenges that China faces now economically in the coming years. And that's kind of what's up next.

HOBSON: And, of course, there's been a lot of focus, even in this country, on this high-profile trial of Bo Xilai, this Communist Party member who was found guilty. Are there signs now that since the trial is now behind us, that the new leaders are going to put a renewed focus on the economy?

LANGFITT: That's certainly the hope of many people, certainly foreign business, but also probably a lot of Chinese. You know, there's a big meeting coming up in November, where they're expected to deal with these problems. And what I know about these problems - you know, we've talked about it before. These are big. They threaten the country's economic future. You've got inefficient state-owned enterprises. They have monopolies. You have tons of local government debt.

Earlier this year, there was an audit that showed that one-third of the provincial capitals, their debt was bigger than GDP. And the Premier Li Keqiang has said, as in the past, they're going to try to do a lot of big reforms. But, you know, as is often the case here, there are not a lot of details, and you don't see a timetable. So we're waiting to see what happens in November at this big meeting in Beijing.

HOBSON: Now, you're in Shanghai, Frank. I have to ask you about this new free-trade zone, they're calling it, that's going to open up. Tell us about that, what it is and what it's going to do.

LANGFITT: Well, it's interesting. We don't know that much about it. It's going to open on Sunday, and it's getting a lot of publicity. And the big picture is to try to liberalize trade in this area, cut regulation, make it easier to do business in China, particularly - you know, for foreign companies, in particular. And the idea is to kind of reduce the government interference, which has been seen as a real drag on the economy in recent years. But, again, as usual, there are no details.

When you talk to analysts, they sort of expect that foreign companies will be able to set up operations inside the zone, better operations and less bureaucracy. Customs and tariff policies probably would be a bit better. Foreign banks are hoping maybe, at some point, they could get wholly owned subsidiaries. But the government, again, we're kind of waiting to see exactly what they have in mind.

HOBSON: So this is kind of a test case, an experiment? This is as if you were to take a neighborhood in New York and just wall it off and say this is going to be a special free-trade zone?

LANGFITT: Well, they've done this in the past. It's really interesting. They used to do these special economic zones, going back into the '90s. And that was where they tried a lot of experiments. And this looks like one where they might be trying experiments, as well, and see how they go here, and then roll them out across the county. The thing is, at the moment, we still don't know exactly what those experiments are going to be. But a lot of people are watching it.

For instance, Hong Kong, which does a lot of business, is actually feeling quite threatened by Shanghai now, thinking that Shanghai will become more effective in terms of helping China deal with the outside world financially. So there'll be an event on Sunday. And then, in the next few months, we'll kind of see what they have in mind.

HOBSON: NPR's Frank Langfitt, in Shanghai. Frank, thanks so much for talking with us.

LANGFITT: Happy to do it, Jeremy.

HOBSON: And you're listening to HERE AND NOW. Transcript provided by NPR, Copyright NPR.