China's Improbable Economic Growth Figures

by: Joseph Trevisani

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?