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BEIJING — China's investment surged in May as the government poured money into its economic stimulus, helping to offset an unexpectedly sharp drop in trade, and economists said the world's third-largest economy was improving.
Spending on factories and other fixed assets soared 32.9 percent in the first five months of the year, the National Bureau of Statistics said. Merrill Lynch said that translated into growth in May of up to 38 percent.
"Domestic activity has picked up, thanks to the government stimulus spending," said economist David Cohen of Action Economics in Singapore.
May exports fell by a record 26.4 percent from the same month of 2008, while imports contracted by 25.2 percent, the customs agency said Thursday. That exceeded most economists' forecasts.
Exports will not recover until key U.S. and European markets rebound, said economist Zuo Xiaolei of Galaxy Securities in Beijing. She said weak global demand for China's goods will hurt its appetite for imports, a big share of which are raw materials and components used by export industries.
"For a fundamental improvement, we have to look to the international market," Zuo said.
Despite the fall in imports, analysts said China's demand for oil, iron ore and other foreign raw materials is rising as Beijing pumps money into the economy through its 4 trillion yuan ($586 billion) stimulus.
"The Chinese economy for sure is improving. We have seen the bottom of the cycle," said Credit Suisse economist Dong Tao.
Other indicators also show the economy is recovering.
Home sales surged 45.3 percent in the first five months of the year from the same period of 2008 to 1.1 trillion yuan ($161 billion), the government said Wednesday. Auto sales are up sharply, driven by cuts in sales taxes and other government incentives.
The contraction in imports was driven in part by a 30 to 50 percent fall in prices of iron ore, oil and other commodities from last year's highs, economists said. They said that meant the value of imports fell even as volume rose.
Beijing's stimulus is based on heavy spending on construction of airports, highways and other public works. Most of the money has gone to state-owned construction companies, but it is spreading to the private sector as builders hire workers. The spending also has fueled a rise in imports of iron ore for steel and other building materials.
By volume, May copper imports soared by an eye-popping 325.8 percent, iron ore by 37.4 percent and steel products by 23.1 percent from the same time in 2008, according to Merrill Lynch. Oil imports rose 5.5 percent.
"Without the improvement in domestic consumption, imports would have fallen further," said Zuo. Noting that January imports plunged by more than 40 percent from a year earlier, she said, "things have improved by half compared with that. But the other half is not something you could change immediately."
A breakdown of the May data indicates exports and imports rose by as much as 2 percent from April, said Cohen, the economist. Beijing only reports trade compared with the previous year, which can conceal month-on-month improvements.
"Things did bottom out in the first quarter and are now on a recovery trajectory," Cohen said. "Maybe it's still sluggish, but it was in freefall for five to six month, then bottomed out and now we are on a gradual upturn."
Chinese leaders have warned that the recovery is still tentative and vulnerable to global economic conditions and have called for vigilance.
China's global trade surplus in May narrowed by 33 percent from the same month last year to $13.4 billion. April's surplus was $13.1 billion.
Exports to the United States contracted by 26.9 percent to $16.7 billion, narrowing the Chinese trade surplus with the United States by 23.7 percent from the same month last year to $10.9 billion.
Exports to the 27-nation European Union, China's biggest foreign market, plunged by 41.3 percent to $17.3 billion, narrowing the trade surplus with Europe by 39.3 percent from the same month last year to $7.7 billion.
"The full economic impact of China's stimulus-driven infrastructure expansion will likely become more apparent in the second half of 2009," Jing Ulrich, JP Morgan's chairwoman of China equities, said in a report. "Policymakers must take steps to ensure that consumption remains on a firm growth trajectory."
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Associated Press researcher Bonnie Cao in Beijing contributed to this report.
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General Administration of Customs of China (in Chinese): http://www.customs.gov.cn
