People walk along a shopping street in Beijing, China Friday

China’s economy is showing signs that a 4 trillion yuan (US$585 billion) stimulus package is taking effect.

China is trying to reverse an economic slide that has already cost 20 million jobs, raising the risk of social unrest as exports plunge and the property market sags. Spending on roads, railways and housing has increased prices for iron ore, put a floor under industrial output and helped to drive a record $237 billion of new loans in January.

“China looks set to be the first major economy to recover from the current global meltdown,” said Lu Ting, an economist with Merrill Lynch & Co. in Hong Kong.

“China is the only economy in the world to see significant growth in credit to corporate and household sectors after September 2008, when the financial crisis worsened to a near collapse.”

The government’s stimulus plan, announced in November, is beginning to gather momentum. Projects like the construction of 3.5 billion yuan worth of public houses in Shaanxi Province and Shanghai began in December, while Shandong Province started work on three new railway lines the same month.

The government is committing about 1.2 trillion yuan to the plan, which means banks’ willingness to fund projects is crucial. So far they are responding.

Toxic assets

The value of new loans in January was more than double the record set a year earlier, according to figures released by the People’s Bank of China Thursday.

The lending multiplies the effect of the government’s spending in ways that would not be possible in the US and Europe, where banks are burdened by toxic assets, said Dwyfor Evans, a strategist with State Street Global Markets in Hong Kong.

While China is the only one of the world’s three biggest economies still growing, the expansion has slowed from 13 percent in 2007 and 9 percent last year.

Growth will accelerate from the current pace to 7.2 percent for the full year, according to Wang Qian, an economist with JPMorgan Chase & Co. in Hong Kong.

Her calculation is that consumption will contribute 4.4 percentage points and investment 4 percentage points. The collapse in exports will slice off 1.2 percentage points.

Stimulus spending will contribute up to 3 percentage points of the total, she estimates.

Global recession

Even if the global recession is protracted, China has the ammunition to maintain growth, said Merrill Lynch’s Lu. It has public debt of only 18.5 percent of gross domestic product – compared with 75 percent in India – foreign currency reserves of $1.95 trillion, and a balanced budget.

“China has perhaps the deepest pockets in the world,” said Lu. “It can relentlessly ramp up spending to create jobs and meet its growth target.”

The government-backed Purchasing Managers Index, a measure of manufacturing, showed a second monthly increase in January after a record low in November.

“The economy is bottoming,” said Tao Dong, chief Asia economist at Credit Suisse AG in Hong Kong, citing the PMI, the surge in bank lending, and spending on construction and machinery because of the infrastructure projects.

Some commodity prices signal a tentative recovery may be under way, as Chinese companies rebuild inventories.

Iron ore, steel

China’s imported iron ore has climbed 28 percent to 690 yuan per metric ton since the end of October.

Hot-rolled steel has surged 41 percent from November 13 to 4,027 yuan per metric ton. The Baltic Dry Index, a measure of shipping costs for commodities, has more than doubled since January 28.

“You are starting to see the underlying demand of the Chinese economy,” BHP Billiton Ltd. CEO Marius Kloppers said February 4. “We have seen in the steel business in China that the de-stocking cycle is almost complete and that means people are coming back into the market and buying.”

BHP Billiton is the world’s third-largest producer of iron ore and China is its largest consumer.

Coca-Cola Co., the world’s largest soft-drink maker, said Thursday that sales volume rose 29 percent in China in the fourth quarter after the company sponsored the 2008 Olympic Games in Beijing.

McDonald’s Corp., the world’s largest restaurant company, said February 11 that it may accelerate expansion plans in Asia to boost market share as the region’s economies slow.

Shares climb

Investors are also showing a renewed interest. China’s stock transactions rose to the highest in at least three years on February 11. The Shanghai Composite Index of stocks has climbed about 36 percent from last year’s November low, gaining 3.2 percent Friday on optimism that government spending will bolster corporate earnings.

Still, any recovery will be modest as weakness in real estate adds to the problem of the collapse in trade, and the surge in loans increases credit risks for banks, economists say.

Exports fell by the most in almost 13 years in January, imports plummeted by a record 43 percent, and house prices across 70 major cities declined by the most since data began in 2005, according to a government report Thursday.

Unbalanced economy

Companies fired workers at a faster pace in January than in December and most businesses faced tougher conditions, said Stephen Green, a Shanghai-based economist at Standard Chartered Bank. “Less bad news is not good news,” he said.

Even if stimulus spending creates 8 percent growth this year, meeting the government’s target, “it will unlikely be healthy, job-creating growth” because mostly it will boost demand for steel and cement and provide little support for consumption, said Green.

The World Bank said Thursday that China has made little progress in rebalancing the economy toward consumption and services from industry and investment.

Source: Bloomberg