Image: A bull statue in Shanghai's financial district © Keren Su, Getty Images

Every time I've written about China lately, I've received this question from readers: "So are you a bull or bear on China?"

I understand the reasons behind the question. It's hard for me to write positively about Chinese stocks right now without a caveat or three. And I can't, on the other hand, say that investors should shun all Chinese stocks.

So put me down as ambivalent. My answer to the question of whether I'm a China bull or bear is a resounding yes, I'm afraid. I'm bullish or bearish on China depending on the time frame I'm looking at.

In the short term, as China's leaders re-accelerate the country's economic growth rate, I'd have to say I'm bullish. In the long term, I find it hard to ignore evidence that China's economy is heading toward some kind of readjustment.

The pickup has started

I think September did mark a growth bottom in growth of gross domestic product. The economy looks likely to show a pickup in growth from 7.4% in the third quarter to something like 8% in the fourth quarter, then move modestly higher in the first quarter of 2013.

But for the long term, logic argues that the big loans from state-owned banks to unprofitable state-owned enterprises at artificially low interest rates (which are being used to finance projects that won't generate a positive return on investment) will catch up with lenders, state-owned enterprises and the government (the real source of the funds).

Jim Jubak

Jim Jubak

That readjustment could be relatively orderly if China's leaders move on reforms to the banking sector and bloated state-owned enterprises. It will be chaotic if the country's leaders dig in their heels against all change and the country has to wait until a crisis forces either reforms or a crackdown on even the current pockets of market capitalism and patriotic dissent. So far, I'd have to say, the proceedings of the 18th Party Congress, which began Nov. 8, don't show much in the way of reforms.

But let's start with the short term, OK?

Signs of a turn

Data for October, released Friday, make a solid case -- when combined with earlier numbers -- that September did indeed mark the bottom of China's growth slowdown.

The National Bureau of Statistics announced that industrial production rose 9.6% year over year in October. That was up from an annual increase of 9.2% in September and 8.9% in August.

Retail sales climbed at a 14.5% annual rate in October, up from an annualized 14.2% in September. Investment in fixed assets -- infrastructure, industrial facilities and commercial and residential real estate -- was up 20.7% in the first 10 months of 2012 over the same period last year. That's a slight uptick from the 20.5% growth rate in the first nine months of 2012.

These numbers, Australia's ANZ bank calculates, are consistent with 8% GDP growth in the fourth quarter. That would be a substantial step up from the 7.4% annual growth rate recorded in the third quarter and the 7.6% growth rate in the second quarter.

I'm of the firm belief that you can never be too cynical about any government's economic statistics -- and especially China's. That these improved growth numbers are arriving just as the Communist Party is installing a new set of leaders isn't a coincidence. But recent numbers don't seem to be made up. They're confirmed by big increases in the production of steel and cement (roughly doubling from levels during the summer) and of electricity (a rough triple). Those statistics are tougher to fake -- which is why they are so often used as a check on government growth data. From this perspective, it looks as if the Chinese economy really is accelerating -- relatively modestly, it's true -- from a bottom in September.

We've seen this pattern before, most spectacularly in the huge stimulus package put together by China's national and local governments and its state-owned banks in a successful effort to keep the country's economy growing right through the global financial crisis. This time around, Beijing hasn't announced a high-profile stimulus package, as it did in 2007 -- but the program has been the same: lots of lending from China's banks and lots of spending by China's national and local governments.

The lower profile has been a response to criticism, inside and outside China, that the stimulus of 2007 led to an overheating of China's economy and a spike in inflation that had to be brought under control by stomping on the economic brakes in 2011 and 2012. This time, the country's new five-year plan said, growth would be more balanced: The country wouldn't rely so much on infrastructure spending and exports but instead would work to increase domestic consumption. Big double-digit wage increases in every year of the plan and increased spending on health care, pensions and education were part of that re-balancing.

But it appears that when push came to shove, when growth threatened to fall below 7%, the government went back to the tried and true. The railway ministry, for example, got a big increase in its debt ceiling so it could increase its spending on China's railroads, not one or twice but three times in 2012. Beijing announced that China would build dozens of new airports. Local governments went back into the business of competing to build the most miles of new subways or give the biggest subsidies to companies in targeted industries such as wind and solar.

The big winners have been China's 145,000 state-owned enterprises. These companies have had access to plenty of capital at low interest rates from China's big state-controlled banks even as privately owned companies have been starved of capital. Because those low interest rates are essentially a subsidy that pumps up the bottom line, state-owned companies are significantly more profitable -- on paper anyway -- than private companies. (It doesn't hurt, either, that the government has ensured that big sectors of the economy are off-limits to private competitors. That lets state-owned enterprises charge more for their products than they could otherwise.) State-owned enterprises make up about 35% of China's economic activity and, officially, generated 43% of the economy's profits.

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