Is China Steadying?

There was the smallest of increases in China's industrial production in December, enough to allow some commentators to suggest that the country's economy was turning.

Coming after the slowdown in growth in the December quarter and a drop in exports, news of a 5.7% rise in output in the month, compared with November's 5.4% rise, was greeted cautiously by most.

The figures were released late last week by China's National Bureaus of Statistics (NBS).

But some claimed the country's slump was slowing and would resume its previous strength.

Maybe. China is still puttering along, but the rate of forward movement is sluggish by its standards (and breakneck by ours).

What we do know is that over all of 2008, China's industrial output rose 12.9% compared with 2007, when the rise was 5.6% percentage points more, or well over an annual rate of 18%.

And as encouraging as December's small improvement on November was, it was still a massive 11.7 percentage points lower than a year earlier, and it was also much lower than in any of the first 10 months of 2008.

In contrast, US industrial production fell 2% in December and a large 7.8% over 2008, according to figures from the US Fed.

NBS head Ma Jiantang called the December rebound a "positive sign" for China's industrial production.

"The growth rate of industrial output was 0.3 percentage points higher than November. Small as it is, it's an important change in industrial activity and could help China's economy rebound," he said in a statement.

Ma said 16 of the 39 industries surveyed had already shown a month-on-month increase in production growth.

A survey conducted by the NBS earlier this month showed steel, coal, ferrous metal and chemical product prices began to rebound after prolonged declines during the second half of 2008, Ma said.

Compared with mid-December, steel prices were up 2.9% to 5.1%, he said. He didn't give details on the other industries.

China's National Statistics Bureau reported that the output of state-owned enterprises and shareholding companies rose 9.1% and 15% in December. The Bureau said these figures include companies with annual sales of at least 5 million Yang ($US731,283), the point at which companies in China are classified as medium to large-scale.

Output of companies funded by foreign investors or investors from Hong Kong and Macao rose 9.9%.

The Bureau said heavy industrial output rose 13.2% in December, while that of light industry was up 12.3%.

NBS statistics showed aggregate industrial profits reached 2.4 trillion Yang in the first 11 months of last year, up 4.9% compared with the same period in 2007.

However, the growth rate was down a very, very sharp 31.8% from a year earlier. In fact you could say the growth rate in profits (as classified by the Bureau) collapsed in 2008, especially in the closing months of the year.

Of 39 industries surveyed, 31 reported year-on-year profit growth. The five fastest growth rates were recorded by petroleum and natural gas extraction, coal mining, transport equipment manufacturing, chemical production and metals processing.

Industrial production growth slowed along with the weakening world economy, which reduced market prices as well as domestic and foreign demand, analysts said.

A statement on the Chinese Government's website said.

"Weakening demand, especially overseas, was a major cause of China's slowdown, as more than 30% of GDP comes from trade-related industries," according to Tang Min, deputy secretary of the China Development Research Foundation.

A report from the International Steel Association last week had some contrasting news about China in 2008. Its steel sector hit a new high, but growth in output slowed, but not as much as in other economies, so China's share of world steel output rose.

China's production rose 2.6%, while South Korea and India grew 3.7% and 3.8% respectively. China became the first country in history to produce more than 500 million tonnes of crude steel in a year.

By contrast, steel production in the US fell 6.8% in 2008. German and Russian production both fell by more than 5%, and Ukraine took the biggest output hit, slumping 13.4%.

As a result, China's share of world crude steel production rose last year to 37.9% from 36.4% in 2007. India's share rose to 4.1% from 3.9%, and South Korea's went up to 4% from 3.8%.

Nearly every other country saw its share of total steel production decline.

And in a sign of the continuing realities of the current state of the economy, the Chinese government has used slumping prices and an oversupply situation to lift price controls on most fertilisers first imposed back in 2004 when prices started rising sharply.

From Sunday prices of domestically produced fertilisers and all fertiliser imports except potash fertilisers will be decided by the market, said the National Development and Reform Commission (NDRC).

The latest move came after Chinese fertiliser prices experienced slumps in the second half of last year and producers are suffering from low prices and insufficient demand from farmers before the spring ploughing season.

The new pricing mechanism was aimed at enabling the market to play a decisive role in allocating resources, promote a sustained and healthy development of the fertiliser sector, and protect the interests of farmers, the NDRC said in a statement posted on its website.

The Commission said some products, such as nitrogenous and phosphate fertilisers, are in oversupply while there are ample supplies of other kinds of fertilisers.

It's a sign that the central government is confident it can engineer a price drop for a key input to farmers without causing a rise in food prices (which have seen price controls relaxed in some cases).

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