China's Third Quarter GDP Report: Warnings for Investors

Excerpts from Dr. Enzio von Pfeil's October 22, 2009, appearance on CNBC Asia:

China economic data were released today - what are your general thoughts? Are you skeptical?

1. Heaven help us if we get one correct number out of China! It is key that the data remain consistently incorrect; that way, we can divine a trend in the data.
2. The overall trend, one of stronger investment and rising consumption, at the expense of exports, looks healthy on the outside.
3. Nevertheless, I cannot trust the robustness of these figures because they are still built upon political motives, as in: “we must grow by that auspicious eight per cent.”

• As an aside, is there any other country in the world that releases its GDP data 22 days after the end of the quarter? Even in the United States the statisticians need much longer.
• The other stick upon which these figures are built is the fiscal stimulus package of $585 billion, as well as the $1.27 trillion in (reckless) lending.
• So nobody can tell just how self-sustaining this growth is.

4. What we do know is that they “have to” reach growth of 8% for the year, so with an average of 7.7% for the first three quarters, they must growth by 9.1% by 4Q09. Why not just come out now and say that they will have grown by 9.1% in 4Q09?

China Q3 GDP quickens - is this just what you expected?

1. Again, my concern is the validity of the figure: of course, it has to grow faster in order to reach that auspicious eight per cent target; so far, for the first three quarters, they have reached 7.7%, meaning that they must grow by 9.1% in 4Q09 to reach the full 8% target.
2. Given the vehemence of the $585 billion stimulus package and the $1.27 trillion in lending, the fact that growth quickened is unsurprising. And “quicken” it will – or, it “must”, in order to reach the 8% target.

Do you expect China to see serious inflationary pressure in the first half of 2010? What is your outlook for China going forward?

1. The less developed an economy is, the more of a threat that there will be too much money chasing too few goods.
2. The fact that per capita incomes are rising would suggest that consumption will remain strong.
3. But, with industrial production remaining strong AND with the RMB remaining strong AND with less reliance on exports, I do not foresee any chance of serious “demand-pull” inflation in the near term.

Do you agree that China's economic recovery still needs to be consolidated?

1. On a regional level, absolutely: the income divide between the 200 million rich urbanites on the coast, and the 1.1 billion unhappy ruralites living inland, is far too great.
2. On a sectoral level, it seems as if consumption needs to grow strongly in order to balance growth out. Currently, consumption accounts for a mere 30% of GDP; in normal economies, it accounts for about 66%

What do the retail sales results indicate? Your thoughts?

1. As Michael Pettis recently pointed out: do NOT confuse “retail sales” with “private consumption:

• Firstly, retail sales figures include government purchases as well as shipments to retailers; they do not just include the end-of-the-chain retail sales at stores, and
• If consumption were rising as fast as retail sales are (i.e. 15%+/year), then why has consumption as a share of GDP stagnated at around 30%, while GDP is growing and accelerating?
• The bottom line is: retail sales are not a good proxy for private consumption.

Are there any other topics you would like to discuss?

1. There is a strong tug of war going on between the growth-friendly government and the growth hawks in the monetary/banking sector. Today’s market slide suggests that the growth hawks are starting to push back.
2. RMB as a free lunch. China, too, is run by politicians. Since July of 2008 they have halted the RMB’s gain. Besides, if locals were so keen on the RMB, then why is so much capital fleeing China – to places such as Hong Kong’s property and stock market

Comments

[huangthomas:]

The skepticism is well justified.

Oct 22 12:09 PM

[notsosmart:]

you can hardly trust our gov on anything.can you believe china or russia?its your hard earned money.you can putin it anywhere.

Oct 22 03:20 PM

[Paul Harper:]

& mine (UK) or yours (US) presumably have no record of massaging figures ? Is the nature of the beast.

am being v cautious on China right now, apart from internet & telco stocks. Growth via public spending is a short term fix, China needs export markets & without Western eonomies also recovering, it will be a tough ride.


On Oct 22 03:20 PM notsosmart wrote:

> you can hardly trust our gov on anything.can you believe china or
> russia?its your hard earned money.you can putin it anywhere.

Oct 23 08:30 AM

[Alphameister:]

Keep adding bricks to that Great Wall of Worry!

Oct 23 04:55 PM

[Ricard:]

"Heaven help us if we get one correct number out of China! It is key that the data remain consistently incorrect; that way, we can divine a trend in the data."

I stopped the moment I read this sentence. I can already tell how objective this article is going to be (zero).

Oct 23 06:19 PM