China's Improbable Economic Growth Figures

China largely escaped the ruin that came over Western financial institutions last fall, but it could not avoid the economic effects of the debacle. The Chinese government has attempted to sustain its economy by spending more than $900 billion of its own and state bank’s funds to support its $4.3 trillion economy until the global trade system recovers and demand for goods once again flows to Chinese factories.

Chinese economic growth since the crash of last September has never approached the standard recession definition of two consecutive quarters of negative GDP. Third quarter growth as recorded by the government was 8.9%. It was 7.9% in the second and 6.1% in the first.

These figures are deceptive twice over. China’s population of 1.33 billion is still growing, though only 0.65% a year and the government estimates that 8.0% GDP expansion is necessary just to give each year’s new workers employment. But internal migration of rural agricultural workers to the cities and economic development zones is adding uncounted millions more job seekers to the unemployment roles of the new industrial China. These workers have to be accommodated or sent home.

Obtaining an 8% year-on-year increase in GDP is the bare minimum acceptable to the Beijing economic planners. In the minds of the central authorities anything lower risks the civil unrest that has so often in China’s history shaken the hold of the central government.

Is it really surprising that a cash and credit stimulus over a year worth almost one quarter of national GDP has produced a burst of economic action? How could it be otherwise? But even the reality of the 8.9% growth can be called into question.

Various secondary statistics including year-over-year figures for exports, down 23.0% in July, 23.4% in August and 15.2% in September and imports, off an average 11.8% monthly in the third quarter do not draw a picture of economic expansion let alone 8.9% activity. The Chinese economy is almost 40% dependant on exports for GDP; if exports are not increasing what is generating the demand for Chinese products? Domestic consumption, retail sales?

But, if the Chinese economy really grew at 8.9% in the 3rd quarter, then secondary statistics should concur. However, several important measures cast doubt on the probability that all is as reported.

For one, exports and imports seemed to be out of line. Exports were down an average of 20.5% monthly in the third quarter and imports fell an average of 11.8%. The Chinese economy is 38% dependant on exports for GDP and it seems odd that goods produced for export orders are then not exported. Imports include both industrial and consumer products, raw materials, components and finished products. It is counter to logic that an economy that is expanding at an 8.9% rate would not need more imports to produce its manufactures especially since a good deal of Chinese exports are assembled from imported components.

The question now is: do the statistics make sense? If the M2 is growing at the documented rates but deflation exists at all levels of the price chain, are retail sales really expanding at the reported 15%? Where are the price pressures? If exports are down and retail sales are questionable is the 8.9% GDP creditable or sustainable?

Chinese M2 money supply grew at a year-over-year average rate of 28.75% in the third quarter, 26.70% in the second quarter and 21.59% in the first. These are Chinese government figures from the People’s Bank of China (PBOC) via Bloomberg. At the same time all price measures, from wholesale goods to CPI, have fallen.

The wholesale price index, the price of goods in inter-business transactions is down an average of 7.0 % in the third quarter, 7.6% in the second and 5.6% in the first (PBOC via Bloomberg). The producer price index representing changes in post production prices dropped 7.7 % in the third quarter, 7.2% in the second and 4.6 % in the first. Prices of retail goods slid 2.25 % in the third quarter (July and August only), 2.03 % in the second and 0.8 % in the first. The producer and retail indices are from the National Bureau of Statistics (NBS) via Bloomberg. Likewise the purchasing price index (raw materials, fuels and power) dropped 11.06 % in quarter three, 10.4 % in quarter two and 7.1 % in quarter one (NBS via Bloomberg). And finally the overall CPI was off 1.26 % in Q3, 1.53 % in Q2 and 0.6 % in Q1. The uniformity of the price direction is striking.

For comparison, United States M2 year on year growth averaged 7.6 % in the third quarter, 8.6 % in the second and 9.4 % in the first. The US Producer Price Index (PPI) was down 5.3% year on year in Q3, 4.3% in Q2 and 1.9% in Q1. CPI is down an average of 1.6% in the third quarter, 1.1% in the second and 0.06% in the first.

Chinese M2 grew 3.8 times faster than the US in the third quarter, 3.1 times faster in the second, and 2.3 in the first. However, Chinese CPI is essentially the same as the US and Chinese producer prices at several levels fell at a much faster course despite more than triple the money supply growth.

The purpose of this exercise is not to make minute comparison of the composition of inflation rates and money supply between China and the United States but to ask the logical question--can M2 grow at these rates in an economy where GDP is expanding at 8.9% and retail sales are rising at 15% and not produce appreciably different inflation rates? And if that is logically farfetched, then which parts of the M2, GDP, retail sales equation is overstated?

The Chinese Government and the PBOC have flooded the economy with cash and loans, but money by itself cannot create demand. And without demand it does not even produce inflation. Judging from the price levels in the Chinese economy consumer demand is minimal. If exports do not pick up who will buy the products of 8.9% growth?

Comments

[Tom E.:]

It does not matter, if the party says that growth is 8.9%, then its 8.9%.

What is scary is when people outside of China use the Chinese statistics to make policy assumptions.

Nov 10 07:56 PM

[HaavBline:]

There are so many loose ends in this casual analysis I think it is a waste of my time.

Nov 11 12:07 AM

[polind:]

For this part:
"But internal migration of rural agricultural workers to the cities and economic development zones is adding uncounted millions more job seekers to the unemployment roles of the new industrial China. These workers have to be accommodated or sent home. "
no offense,but you really need to do your homework before making a presentation

Nov 11 02:54 AM

[huangthomas:]

A healthy dose of skepticism is required to read Chinese official economic data, which is loaded with inconsistency.

Nov 11 05:43 AM

[The Alchemist:]

There are lies, damn lies, and statistics. The problem lies not only in China but for all. There is a disconnection between wall street and main street, and common senses are all but lost. People focus too much on Asia's growth but not on the western decline, when in reality both are connected. Stimulus spending means little when all that money in reality is just paper. Sure, people will work for those paper, but what they produce in the end might be meaningless. I could dig a hole and say my labour just generated a thousand dollars of GDP cos I think if someone continues to dig they might eventually hit oil or perhaps treasure. Statistics have become too subjective, case in point: copper prices kept going up because there is suppose to be high demand from China, yet copper stock has been piling up in the LME at an alarming rate (albeit slower than last year). I guess at this point absolutely everything must go right and human beings must become flawless for any meaningful upside in the market, and I don't see that happening, at the very least, I'm hedging my long positions, and most definitely out of the market by february.

Nov 11 07:01 AM

[Tony Daltorio:]

The author should bone up before writing an article and get more recent information -

The paragraph about the migration of rural agricultural workers to the cities could have been written a decade ago...China has instituted many support programs in the rural areas - there is no longer a mass migration to the cities.

Nov 11 02:10 PM

[JMBishop:]

Oh come on HaavBline: you've got the time and the stuff. I've read some of your other comments on the "China question," and these were very informative. Go ahead. Tie up the loose ends. I dare ya!


On Nov 11 12:07 AM HaavBline wrote:

> There are so many loose ends in this casual analysis I think it is
> a waste of my time.

Nov 13 05:55 PM

[Laybon:]

what can I say? eh--- do some more reading before writing next time

Nov 13 11:03 PM

[stockratease:]

Excellent article. You are addressing an important question which has been raised recently by the Chinese press themselves:

On Aug. 3, the Beijing Times raised doubts about the government's statistics on economic growth for the first half of the year, noting that the total GDP for China's provinces was 1.4 trillion yuan ($205 billion) higher than the figure for the entire country.

The English-language China Daily quoted one economist who blamed the discrepancy on double-counting of company subsidiaries in the provinces. But the 10-percent difference in estimates may be too large to be so easily explained.

Peng Zhilong who is director of the NBS national economy assessment department was quoted in the People's Daily as saying " It is possible that a few provinces overstate their economic situation"

So there it is right from the horse's mouth....even the Chinese people don't believe the GDP figures.. why on earth should we?

Anyway just as long as they keep propping up Uncle Sam's paper who cares?

Nov 14 06:58 AM

[thotdoc:]

I don't know enough to know this is casual. Apparently you do know enough. Would you be willing to teach us?


On Nov 11 12:07 AM HaavBline wrote:

> There are so many loose ends in this casual analysis I think it is
> a waste of my time.

Nov 14 09:44 AM

[bluesky123:]

tell the people of Wisconsin that China's growth is "improbable" and they will laugh you out of town. Wisconsin's economy is benefiting quite nicely from soaring China demand. Figure it out. There's a new 800lb gorilla in the room called China which is turning global trade upside down. Lament it, love it, whatever. Or you could just make money.

www.msnbc.msn.com/id/3.../

Nov 15 01:29 AM

[bluesky123:]

China power consumption is up for the 5th consecutive month. Their industrial consumption of electricity is up 17.7% in the last year. I don't know what metric is a more reliable indicator than electricity consumption by the factories.

www.chinadaily.com.cn/...

Nov 15 04:36 AM

[Peter Cooper:]

Yes Jim Chanos, the hedge fund super short, is shorting China for exactly this reason - reality is so far away from market expectations, see: arabianmoney.net/2009/.../

Nov 15 04:39 AM

[redchildren:]

China vehicle sales surpassed the US this year. Property markets continue to climb. GDP is not 38% dependent on export. One is a stock concept, the other is a flow concept. For the first three quarters, China's GDP grew 7.7% yoy. Consumption contributed 4%, investment 7.3%, net export -3.6%. What doesnot make sense to you?

Nov 15 04:55 AM

[macro -N- i...:]

You question the economic statements from a country on the other side of the planet but accept as fact when the U.S. government buys a car company, pays people to buy the cars, and then uses the sales for their own GDP report?

Nov 15 10:18 PM

[tripleblack:]

This assumes that the same folks producing the other statistics have nothing to do with the statistics you are citing...

Transparency vs opacity - information vs suspicion.

China has come a long way in this regard, and to be blunt, I am just as distrustful of the similar statistics coming out of Washington, Berlin, Paris and London, though the odds that the Western newsies will ferret out any really gross fraud are slightly higher than in Beijing.

In general terms, I would not recommend trusting ANY such government pronouncements or statistics over-much, from ANY government.


On Nov 15 04:36 AM bluesky123 wrote:

> China power consumption is up for the 5th consecutive month. Their
> industrial consumption of electricity is up 17.7% in the last year.
> I don't know what metric is a more reliable indicator than electricity
> consumption by the factories.
>
> www.chinadaily.com.cn/...

Nov 16 01:52 PM

[Mad Hedge F...:]

ubh I have long sat beside the table of Mckinsey & Co., the best management consulting company in Asia, hoping to catch some crumbs of wisdom. So I jumped at the chance to have breakfast with Shanghai based Worldwide Managing Director Dominic Barton when he passed through San Francisco visiting clients. These are usually sedentary affairs, but Dominic spit out fascinating statistics so fast I had to write furiously to keep up, sadly letting my bacon and eggs grow cold and congeal. Asia has accounted for 50% of world GDP for most of human history. It dipped down to only 10% over the last two centuries, but is now on the way back up. That implies that China’s GDP will triple relative to our own from current levels. A $500 billion infrastructure oriented stimulus package enabled the Middle Kingdom to recover faster from the Great Recession than the West, and if this doesn’t work, they have another $500 billion package sitting on the shelf. But with GDP of only $4.3 trillion today, don’t count on China bailing out our $14.4 trillion economy. China is trying to free itself from an overdependence on exports by creating a domestic demand driven economy. The result will be 900 million Asians joining the global middle class who are all going to want cell phones, PC’s, and to live in big cities. Asia has a huge edge over the West with a very pro growth demographic pyramid. China needs to spend a further $2 trillion in infrastructure spending, and a new 75 story skyscraper is going up there every three hours! Some 1,000 years ago, the Silk Road was the world’s major trade route, and today intra Asian trade exceeds trade with the West. The commodity boom will accelerate as China withdraws supplies from the market for its own consumption, as it has already done with the rare earths. Climate change is going to become a contentious political issue, with per capita carbon emission at 19 tons in the US, compared to only 4.6 tons in China, but with all of the new growth coming from the later. Protectionism, pandemics, huge food and water shortages, and rising income inequality are other threats to growth. To me this all adds up to big core longs in China (FXI), commodities (DBC) and the 2X (DYY), food (DBA), and water (PHO). A quick Egg McMuffin next door filled my other needs.

Nov 16 05:34 PM

[Joseph Trev...:]

Any government has an interest in presenting its best face to the world. This is true for Beijing and Washington, Paris and Brussels. But for Beijing the non governmental sources of information are few and that by itself should engender skepticism. Far Eastern Economic Review has this interesting article on the subject: (www.feer.com/essays/20...).

China's internal migration is not ended (www.stratfor.com/china...; www.feer.com/reviews/2...), and there is no reason to think that it will. Historically one of the primary effects of industrialization is the movement of rural population to the cities. China will be no different.

The fact that electricity consumption is higher for five months in a row is a sign that factories are running, not that anyone is buying their goods. Government stimulus on the scale of China or the US will produce economic action. My doubt is on the scale of reported economic growth in China and its sustainability.


Joseph Trevisani
FX Solutions

Nov 16 07:07 PM