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Economy

Chinese economy's fragility under renewed focus

China faces a major oversupply of steel.

SHANGHAI -- Investors are growing increasingly anxious about the perceived fragility of China's economy as new manufacturing data highlights a sluggish recovery and liquidity-absorbing moves by the central bank raise fears of a bubble.

     An open-market operation Thursday by the People's Bank of China absorbed 60 billion yuan ($9.86 billion) from interbank markets. Market players were startled by the move, which came on the heels of Tuesday's 48 billion yuan funds-draining operation.

     These marked the first Chinese steps to absorb liquidity in eight months. The central bank supplied 255 billion yuan in late January, when the Argentine peso's plunge shook global markets. Now, given the growing problem of shadow banking, it is instead trying to drain the excess.

     Despite the abundance of free-floating capital, the economic recovery has been listless. The HSBC Flash China Manufacturing Purchasing Managers' Index declined to 48.3 for February, coming in under the boom-or-bust line of 50 for a second month.

     The manufacturing sector usually starts ramping up production after the Lunar New Year holiday. But this year, coal inventories are building up at power plants in coastal areas. Factories are operating at lower rates, keeping electricity demand down.

     Steel product inventories at major Chinese steelmakers jumped 20% between the end of January and early February. Far from stepping up production, manufacturers are hurrying to shrink stocks in the face of falling demand.

     Premier Li Keqiang is in the process of pushing through structural reforms aimed at market-based growth, dubbed Likonomics. Still, some in the market speculate that the government and the Chinese Communist Party may embark on economic stimulus. Growth dependent on government-driven investment may cause surplus funds to increase even further.

     One indirect cause of the bubble fears and production overcapacity is the 4 trillion yuan stimulus implemented after the 2008 financial crisis.

     Excess capital flowed into regional infrastructure development and real estate investment via shadow banking, leaving small and midsize businesses without necessary funds. This uneven distribution of wealth is another distorting factor that will not be easy to fix.

 

 

 

 

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