Unlike American data, which just isn't released right now, Chinese data is released and always meets Beijing expectations but given the obvious manipulation it is always difficult to tell what they actually mean. The recent announcement of 7.7% GDP growth in China is right in line with Beijing's target, which should come as no shock. This is why when Beijing does release bad news, you know that it is much worse in reality. Call it the Beijing discount.
Despite the Baghdad Bob reassurances that economic growth will come in at the expected 7.5%, the underlying data still continues to underwhelm telling a very different story. IBM (IBM) dropped on Wednesday after they reported a 4% decline in revenue, primarily attributable to a slow Chinese market. This fits closely with my own conversations with similar firms and the numbers they are expecting. One contact from a well known tech firm told me top line growth would be in the "low to mid single digits" with profits under a lot of stress due to rising costs. Companies in a range of other industries are reporting similar numbers that simply do not support the Beijing data.
Nor is this slow down related strictly to ongoing business but new investment. Foreign direct investment into China rose by only 6.2% year over year to close out September. Given the Chinese reliance on investment, comprising about 50% of the economy, if investment growth does not maintain its torrid pace, this could spell real problems for the overall economy. The slowdown in FDI foretells two specific larger problems.
First, China is not a low cost producer. Wages are not low and they cannot compete with lower cost producers. Nor however, is China successfully migrating in large numbers into higher value added products. This is the dreaded middle income trap where countries successfully lift themselves out of the low income classification but struggle to move into a high income status.
Second, China is not a hospitable place to do business. Any Chinese businessman will tell you that and foreigners are casting a more discerning eye to the Chinese market no longer lured by the promise of 1.3 billion consumers. Whether it is the ongoing intellectual property theft, wages rising at 15-20% annually, or being the only companies targeted in anti-trust and pricing raids, foreign firms are not actively expanding into China.
Export data, a long term driver of Chinese growth, is also not showing the numbers necessary to produce 7.8% growth. Exports from China in September fell 0.3% from the year before and China is especially concerned about emerging market trade partners who have slowed their purchase of Chinese goods. None of this data is emblematic of an economy that is seeing just a deceleration of growth. This data indicates a much more rapid decline in growth than Beijing is willing to admit.
The top line data is right in line with expectations because when you make the data up, you should never be surprised at what it reveals. The underlying data, however, continues to diverge from the headline numbers. If FDI, corporate revenue, and exports are all slowing or declining at much larger rates than GDP, this implies that consumption is growing at extremely rapid rates which simply have not appeared. The ongoing divergence between GDP and all other economic data is extremely worrying given the well known manipulation of data by Chinese economic authorities.