China's GDP Figures

by: Scott Sumner

Last June the consensus forecast called for 6.9% RGDP growth in China in 2015, and 6.8% growth in 2016. A week ago the consensus called for 6.9% in 2015 and 6.4% in 2016. Tuesday China announced that 2015 growth came in at 6.9%, right on the consensus forecast. Nominal GDP grew by 6.4%. The fourth quarter RGDP growth rate was 6.8%, with nominal growth of only 5.8%. A few comments:

The data may be fake, and hence meaningless, but global stock and commodity markets rallied on the news. Bond yields rose. That tells me the data is probably not meaningless, although clearly it may be biased (and the market may be filtering out that bias, looking for the grains of truth within.) It's interesting that global asset markets seem to respond more strongly to the supposedly meaningless Chinese data than to the US GDP data. If the markets are interested, then market monetarists are interested.

The transition from industry to services continues:

Resilient growth in the emerging services sector helped cushion the slowdown in manufacturing and construction. The services sector grew 8.2 per cent in real terms in the fourth quarter versus 6.1 per cent for the industrial sector. . . .

Fixed-asset investment - which covers infrastructure and factory construction - grew 10 per cent in 2015, the weakest full-year growth since 2000 and down from 10.2 per cent in the first 11 months of the year. Infrastructure was the biggest drag, as growth fell back in December after fiscal stimulus had sparked a brief rally in previous months.

"The GDP figure looks fine but the disappointing part is very weak fixed-asset investment," said Zhu Haibin, China economist at JPMorgan in Hong Kong.

"It raises questions about how effective fiscal policy has been. A big concern is whether the manufacturing slowdown will cause big unemployment. But if the service sector is resilient, that will create new jobs. The divergence in the economy will continue," he added. . . .

While the rebalancing of the economy away from manufacturing and construction continued, services growth slowed from 8.6 per cent in the third quarter as the contribution from financial services weakened.

"Based on this data, policymakers definitely need to do more," said Xu Gao, chief economist at Everbright Securities in Beijing.

"The slide in services growth was expected, given the stock market. That's going to continue in 2016, so if there's not a clear recovery in the industrial sector and infrastructure investment, it will be very tough to meet next year's 6.5 per cent target."

And Reagan would be pleased by this, but will they carry through? (I say only about 20% of what they should do.)

At the outset of his presidency, Xi Jinping billed himself as a transformative leader in the mould of Deng Xiaoping, the Chinese strongman who set the country's economic rise in motion in the 1980s. Now Mr Xi is turning to two more political giants of that decade - Ronald Reagan and Margaret Thatcher - for inspiration as he seeks a "supply side" revolution for China's economy.

Like the late US president and UK prime minister before them, Mr Xi and his premier, Li Keqiang, want to reduce taxes and red tape for businesses as they seek to cushion the decline of heavy industry with the rise of the consumer and service sectors. . . .

While there is no denying the dynamism of China's consumer and service sectors - many of them dominated by private and foreign enterprise - the government has not traditionally been willing to take decisive action to reduce industrial overcapacities.

"Mergers and acquisitions rather than bankruptcy and liquidation would be the [government's] preferred approach to 'zombie companies'," Tim Condon, ING chief Asia economist, wrote last week. "The industrial restructuring debate frequently pits Anglo-Saxon restructuring, where costs are recognised up front, against Japan-style restructuring where concessions and debt relief spread the costs over time. We see the [Chinese] authorities adopting an in-between approach."

Another FT post has my view of the situation:

In a China-watching community where those at the extremes - "maximum" bulls and "coming collapse" Cassandras - often make the most noise, Jonathan Anderson at the Shanghai-based Emerging Advisors Group has long been regarded as one of the most thoughtful analysts. For years he laid out a convincing case for cautious optimism on the Chinese economy, but not any more.

"For years we have been waiting for China to make the tough choice and sacrifice near-term growth in order to stabilise macro balance sheets and stop its exploding debt cycle," he wrote on January 4, the first day of this month's market and currency mayhem. "[But] the costs of taking real adjustment are clearly too high for the government to bear . . . Right now we put the initial potential crisis threshold at around five years."

China will likely eventually face some sort of financial crisis, but it's impossible to predict when. So the safest prediction is for continued rapid growth, slowing gradually over time. I am predicting 6.0% growth for 2016, and hence am more bearish than the consensus.

In terms of policy, they need a more expansionary monetary policy and a more contractionary credit policy. A 10% devaluation of the yuan would make restructuring less painful.