China reported 7.5% GDP growth in Q2 2014, but independent surveys show businesses experiencing deteriorating sales and confidence. While government investment in infrastructure like railroads is increasing, private sector investment and exports are slowing, and retailers and manufacturers report weak business. The recovery appears driven primarily by government spending, while many individuals and private companies are still struggling with sluggish demand.

1. China Sees a Recovery, on Paper
Photo
People shopping at the wet market in Baiyun District, Guangzhou, on Wednesday. Credit Forbes
Conrad for The New York Times
HONG KONG -- Ou Chengbi, a butcher at a sweltering open-air market on the outskirts of
Guangzhou in southeastern China, can scarcely see signs of recovery in her country's economy.
Dripping with perspiration near unrefrigerated slabs of beef in her stall, she described how as
recently as last winter she could still chop up an entire cow each day and sell it all.
"Now I can only sell half a cow a day," she said.
Millions of Chinese merchants like Ms. Ou seem to be struggling, even as data suggests growth is
stabilizing.
The National Bureau of Statistics in Beijing announced on Wednesday that economic growth climbed
7.5 percent in the second quarter, compared with a year earlier. But independent surveys of
businesses across China show that in sector after sector, sales and confidence are still deteriorating.
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"All of them are pointing in the opposite direction from this supposed G.D.P. number," said Leland
Miller, the president of China Beige Book International, a New York data service that surveys 2,200
private businesses across China each quarter to gauge economic activity.
Photo
Ou Chengbi, right, a butcher at an open-air market on the outskirts of Guangzhou. Sales at her stall
are down sharply. Credit Forbes Conrad for The New York Times
One of the biggest engines of Chinese economic growth in recent years -- construction and other
investment in the private sector -- is sputtering, while exports have only begun to recover from a
weak winter and retail sales growth is leveling off. That leaves government investment and
spending, which are running strong, propelled by redoubled lending this spring by the state-
controlled banking system to the national railroad system, local governments and state-owned
enterprises.
The result has been frenzied spending on the construction of railroad lines -- up 32.1 percent in June
from a year earlier -- and subsidized housing. Steel output in China is setting records by tonnage as
a result, even as the number of housing starts in the private sector is falling steeply.
Total lending has now risen faster than economic output, even before adjusting for inflation, in every
quarter since late 2011. Lending accelerated further in June, according to figures released on
Tuesday by the central bank, the People's Bank of China. Yet Mr. Miller's survey and others show
that private businesses are becoming less and less interested in borrowing money because they see

2. few opportunities to invest it profitably.
"We have not felt any improvement in our business since the beginning of the year," said Wan
Yanhong, the business manager at the Nanchang Zerowatt Electric Appliance Company in
Nanchang, in south-central China.
"Generally speaking, comparing recent months to the same period last year, business has been very
slow and very quiet," said Kay Lam, the manager of UB Office Systems, an office furniture store in
Guangzhou.
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Economic Uptick
China's economy grew at a slightly higher rate than many analysts had expected in the second
quarter of 2014.
Chinese officials have repeatedly called for rebalancing the economy, encouraging more spending by
households, which save nearly half their incomes, and less dependence on debt-financed investment
projects. But each time growth starts to fall below the official target of roughly 7.5 percent -- as it
did in the first quarter, when it was 7.4 percent -- the government quickly opens the spigots for
further credit.
Some economists inside and outside the government contend that China has a choice: Slow down
the lending and accept steady declines in economic growth each year, or continue heavy lending and
risk a sharp drop in economic growth someday when the financial system begins to teeter.
"Although there is no way to predict with accuracy and certainty the point at which China will reach
the limits of its debt capacity, I believe that current rates of credit expansion can continue at most
for another 3-4 years," Michael Pettis, a finance professor at Peking University's Guanghua School of
Management, wrote in his newsletter after the release of the data.
China's economic outlook retains pockets of long-term strength. One of them is that tens of millions
of Chinese workers have more money to spend each year. The data Wednesday showed that average
wages for migrant workers were up 10.6 percent this summer from a year ago. That was nearly five
times the increase in consumer prices over the last year, at just 2.3 percent.
Though migrants often have less than a high school degree, they have fared better than more
educated young people in China's job market in recent years, as a quintupling in the number of
college graduates has produced a glut in a country still heavily reliant on blue-collar sectors like
construction and manufacturing.
Photo
Redevelopment at the site of an old airport in Guangzhou, Guangdong Province. Credit Forbes
Conrad for The New York Times
Xu Hua, a graying, unshaven man wearing shorts and no shirt, strained to carry a succession of
enormous white sacks of rice on Wednesday from a delivery van into a Guangzhou restaurant. But he
said the task paid better than it did a year ago. He and a co-worker each earned 50 renminbi, or
$8.10, for more than two hours of unloading the truck; they earned 40 renminbi for the same job a

3. year ago, Mr. Xu said.
"Who is willing to do this anymore?" he added.
Consumer retail sales are also growing strongly, up 12.4 percent in June from a year earlier,
according to government figures released on Wednesday. That nearly matches a pace of 12.5
percent in May.
But that has not been fast enough to offset the effects on the economy of a deceleration in private
sector investment, including a 14 percent drop in housing starts in June compared with a year
earlier. Prices for new apartments have dropped in some cities, and the number of transactions has
slumped.
Most economists say Chinese households have the financial strength to step up spending faster than
their incomes by reducing their prodigious savings rates. But for revenue, the Chinese government
relies heavily on steep value-added taxes that penalize consumption, while a faltering housing
market has damaged confidence.
"There are fewer people even coming in to look," said Deng Weiping, a wholesaler at a fabric market
in Guangzhou. "And the people who do come in buy less than before."
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-feeling-the-effect.html