Chinese Stimulus Buoys Its Own Economy - Not the World's

It has been more than two months since I wrote on Chinese industrial production. At that time, the effects of the stimulus was not apparent. Latest industrial production figures numbers from the Chinese Bureau of Statistics are giving some clues about how the stimulus is affecting the economy. With five months of data so far it, is looking like actions by the government in Beijing have stabilized the economy but resulted in little to no year over year production growth.

Zero growth in a relative sense is nothing to feel bad about. Virtually all the developed countries have experienced double digit drops in industrial output. Countries with export-led economies like Japan, Germany, and South Korea have experienced the worst declines. Thus for China, the most export-led economy of them all, to be roughly flat year on year is some accomplishment.

I often find discussions on the Chinese economy high on rhetoric but low on detail. It is true that good figures on Chinese industrial activity that tie in some detailed way GDP are tough to find. I like indicators that measure output (production) rather than input (investment) because governments around the world are notorious for squandering money through stimulus programs. For industrial production, the government releases each month unit output of production for almost seventy different categories. These range from cars to cement to steel products to fax machines.

I am not trying to predict China’s growth in GDP, which will be somewhere between four and eight percent, substantial when compare to most other countries. I am, however, trying to gauge how much China’s economic engine can legitimately be credited for providing global growth and consumption of raw materials.

There are indications that China is using the recession as a time to stockpile raw materials such as copper and iron ore at relatively cheap prices. Yet, the bidding of prices higher by western investors only makes sense if Chinese factories are truly consuming these commodities at a new record pace. For this reason I look to industrial production.

Of course, there is the widespread western skepticism that all numbers out of China are doctored. In each of the single categories of production there is great volatility from month to month. Throughout the darkest days of what people are now calling this “great recession” we are in, growth in almost all categories turned negative, in some case profoundly negative.

Thus, the numbers do not have the feel of something tightly managed. I choose look at them as a reference point and see what they say.

The picture of Chinese industrial output is decidedly mixed. The graph above shows the year over year growth of units produced in four categories. These are four categories I have referenced in the past couple of articles. They sample of infrastructure (steel materials), agricultural growth (tractors), consumer discretionary (automobiles) and exports (all).

In some cases, such as autos, spending has rebounded on the back of favorable bank lending in China. Other categories such as air conditioners have not seen a month of positive YoY growth for twelve months now reflecting a cautious consumer domestically and abroad. Steel has rebounded thanks to government stimulus of infrastructure. Lastly, tractors are just plainly volatile.

I admit that looking at just a few categories can be dangerously misleading. Depending on your frame of mind, a person could choose a selection of categories to make growth look robust (autos) or moribund (tractors). Thus moving to a summary view is critical.

With such varied categories, it is rather impossible to sum up them all to get a simple average of growth. It is possible to see how many categories are showing negative, moderate, or substantial growth and compare this to a similar growth profile this time last year

For those that never took (or did not enjoy) statistics in college, the method is called a histogram. You create a set of growth bands, say 0% to 10% growth, another from 10% to 20%, a third at -10% to 0% and so on. Then you simply count how many categories fall into that growth band. The resulting graph should resemble a “bell curve”, the center of which is essentially your average.

Chinese production growth has shifted from >12% to just above 0%. As expected, the data from each year forms a normal distribution but they are offset by a little more than one growth band (10%). The median, the center-most category, has shifted from 12.7% growth for the first five months of 2008 to 0.4% for the same period this year.

China’s official GDP growth rate was 10.4% for the first half of 2008. This is not to imply that China’s GDP growth rate for the first half will be near zero. As I said, I expect somewhere from 4% to 8%, as the growth rate for 1Q’09 was 6.1%. Government investment is a key component of the GDP equation and will be used to keep China’s total economic growth well above zero. The U.S., Japan, the U.K., Australia and many other countries (except for Germany) are also doing such spending for the same reasons. Only in China will it be large and effective enough to keep growth positive.

Chinese economy keeps itself above zero but unlikely to drive global growth. With industrial production essentially flat from 2008 to 2009 it is hard to argue that it is the input to Chinese factories will drive global growth. While China may be back to its mid 2008 industrial output pace, the rest of the major economies are 10% to 20% below their previous peaks. This fact is reflected in global trade, the drop of which is also measured in double digits.

The ability to keep industrial output flat year over year and demonstrate any growth for the overall Chinese economy is no small feat. However, the extrapolation that this is bringing back the torrid pace of global growth or demand for commodities seen in 2007 and 2008 is quite a stretch.

Disclosure: No positions.

Comments

[Alphameister:]

Seems like a very sober and realistic assessment of the realities re China and the world economy. The title perfectly captures my own view of reality.

Jun 23 11:00 AM