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China's economy still waiting to return to full power

(Xinhua)
Updated: 2009-04-20 18:39

Most people are alarmed when their power bills rise. But Wang Wenxu has been happily watching electricity consumption increase at his company for the last two months.

Belt maker Chengda Belt, where Wang is a senior manager, is based in the city of Wenzhou in eastern China, home to almost 300,000 small and medium-sized private export firms that manufacture everything from shoes to sunglasses for consumers around the world.

Since the end of the Chinese Lunar New Year, Chengda has seen overseas orders rise, assembly lines running at almost full capacity and more than 650 staff working overtime. More importantly, it's in profit again.

"In the last two months, total orders are 1 to 2 percent more than the same period last year," Wang says.

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With production up, Chengda uses more electricity. In the last two months, Chengda paid 70,000 yuan ($10,248) for almost 70,000 kilowatt-hours of power to produce up to 1.35 million belts each month.

In contrast, late last year when China's export industries were hard hit by plunging global demand due to the financial crisis, Chengda consumed just 20,000 kilowatt-hours a month.

"At that time, our foreign orders dropped by more than 40 percent. We produced about 600,000 belts a month and for every belt, we lost $2," Wang said.

At peak times before the export slump, Chengda consumed more than 80,000 kilowatt-hours of power and produced about 1.5 million belts a month, 80 percent of which were shipped to American and European markets.

Power consumption is a closely watched early indicator of the vitality of China's economy, because so much of the country's growth relies on power-intensive industries such as steel, aluminum and chemicals. Power consumption closely tracks the true pace of industrial activity since industries account for 74 percent of the total.

As many factories like Chengda resume production at part or full capacity, China's power consumption has picked up gradually in the last two months, in one of the key indicators that economists and officials said the Chinese economy had bottomed out.

The China Electricity Council (CEC) announced on April 14 that power consumption stood at 283.4 billion kilowatt-hours in March, a drop of 2.01 percent from a year earlier, but a jump of 15 percent from February's 245.5 billion kilowatt-hours.

In the first quarter, power consumption totaled 781 billion kilowatt-hours, down 4.02 percent from a year earlier, a milder decline than the 5.22 percent year-on-year slump in the first two months.

The CEC figures show China's monthly power consumption began to contract in October last year, when the country consumed 269.9 billion kilowatt-hours, a decline of 3.7 percent year on year.

In the following two months as the global financial crisis hit harder, the downward pace of demand accelerated. In November, consumption was 256.2 billion kilowatt-hours, down 8.6 percent, and in December it was 273.7 billion kilowatt-hours, a drop of 8.93 percent.

Wang Zejun, an industry analyst with Beijing-based Huarong Securities, said consumption rose in February and March as construction began on many projects in the 4-trillion-yuan stimulus plan.

It was also a result of a series of aggressive measures taken by the government to stimulate the economy, including export tax rebates, which allowed Chengda Belt to raise profit margins while slightly cutting prices.

Wang Wenxu says that rise in orders is partly due to the closure of many smaller belt-making companies since late last year and overseas buyers moving orders to bigger firms like Chengda.

The government has raised tax rebates on the export of thousands of items six times since August last year. For belts, the tax rebate rate has risen from 5 percent to 14 percent.

Wang, the analyst, said the month-on-month increase in consumption, along with other indicators like rising industrial output, increasing share prices and fixed-asset investment, was a sign of economic recovery.

China's GDP grew 6.1 percent year on year in the first quarter, the lowest in 10 years. But the government claimed stimulus measures had produced positive results and the first-quarter performance was better than expected.

Wang, however, warns that future power consumption could fluctuate unless power use of power-consuming heavy industries, like steel and mining, stops falling and begins to rise steadily.

Citing falling electricity output in the last 10 days of March and the first 10 days of April, Wang says fluctuating power demand means economic recovery will not be easy.

In the last 10 days of March, China's power generation fell 2 percent year on year, compared with a more than 1-percent increase in the first 10 days of March, according to the Dispatching Center of the State Grid.

The downward trend accelerated in the first 10 days of April, when generation dropped 3.5 percent year on year.

The sharper drop is possibly a reflection of reduced industrial production, Wang says.

The drop in power output in south China, including the biggest export province, Guangdong, accelerated in the first 10 days this month, which he interprets as a poor omen for economic recovery.

"Only by the end of the second quarter will we be better able to tell whether there is a solid recovery," Wang says.

Tang Min, deputy secretary general of the China Development Research Foundation, echoes his view.

Tang says that even in Zhejiang province, home to Wenzhou, many small and medium-sized firms are still experiencing difficult times with no signs that they are planning new investments.

"First-quarter economic data indicate signs of recovery, but these are natural results of record credit and aggressive government policies to stimulate the economy," he says.

And he warns there will be little investment in the second and third quarters.

The world economy is also showing no signs of a turnaround in coming months and demand for Chinese products will still be weak, Tang says.

Zhou Dewen, president of Wenzhou's association of small and medium-sized enterprises, is more pessimistic.

It is too early to talk of an overall recovery since overseas demand continues to slump, Zhou says, and Wenzhou's manufacturing economy has not reached the bottom.

Even Wang Wenxu is worried though production is close to pre-slowdown levels.

"In April, so far, so good. But I am really not certain what will happen in May and June. There are still uncertainties in both the Chinese and world economies," he says.