China's uncertain recovery

Profits from China’s nationally-owned enterprises declined 7.5% in May 2009, as a direct result of consecutive, sharp decreases in China's exports and foreign direct investment (FDI). The latest data also showed the stimulation loan released by Chinese banks were too concentrated in the first quarter; while lacking strength to back them up later.

Exports, FDI continue to decline

Data recently published by China's General Administration of Customs indicate that China's exports in May fell by $88.76 billion U.S. dollars, representing a 26.4% decline from last May. The drop was higher than the 22.6% decline rate of April 2009.
Moreover, China's FDI was $63.79 billion U.S. dollars in May; showing a drop of 17.8% from last May It is the eighth consecutive monthly FDI decrease, according to The Wall Street Journal. About 10% of Chinese jobs and more than 50% of trades are related to foreign-invested enterprises in China. FDI’s continuous decline is also adding pressure to China’s overburdened job market and economic recovery.
Increased investment in fixed assets lacks backup strength
The Chinese government is turning to large-scale public projects and industrial support policies for its economic stimulation because of the huge decline in FDI. However, new projects and support policies require a large amount of loans through banks or funds from government spending. As a result, new loans released by Chinese banks in the first quarter of 2009 surged to 4.58 trillion RMB, which is about 244.36% of the amount of last year’s loans. The majority of the new loans went to nationally-ownedenterprises.
Since the beginning of 2009, the profit growth rate of China’s nationally-owned enterprises fell substantially. China’s Treasury Department announced that for the first time, the profit growth of nationally-owned enterprises was reduced to a negative rate, from 0.5% in April to -7.5% in May. According to Chinese financial analysts, there are too many new projects driven by the government’s stimulation policy, and overpayments in advance of those new projects due to loans that are easily-obtained; all of which have led to a false fast profit growth. Additionally, bank loans are too concentrated in the first quarter to back up in the following year, which will reduce the subsequent growth of corporate profits.
Disputes raised by China’s policy to buy domestic products while expanding domestic demands
China's National Development and Reform Commission recently required various levels of China’s government departments to give priority to buying domestic products to stimulate domestic demand. Experts from the World Bank warned that the costs of this action to China would outweigh its gains.

The Frankfurter Allgemeine newspaper also reported that China is highly dependent on exports. If other countries follow China’s example, it will initiate a wave of protectionism globally; thereby giving the West even more reasons not to buy China-made products—further damaging China’s precarious recovery.