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Questions for China?

Posted by Joseph Trevisani on Jun 10, 2013 11:04:00 AM

How fast is the Chinese economy growing? Officially GDP expanded at a 7.7% year over year rate in the first quarter. However, Beijing Government statistics, particularly nationwide closely watched figures like GDP, are commonly viewed with some skepticism outside of China. The real growth rate may well be lower, it certainly is not higher.

New figures from the mainland have highlighted some of the problems with official economic information.  If the secondary data is weak how can the headline figure perform so much better? Without being able to conclusively answer the question, we can illustrate some of the statistical divergences.

Exports in May were 1.0% higher than a year earlier. Expectations were for a much greater 7.4% increase which, even so, would have been half the April 14.7% pace.

Wide variation is not unknown in the export number. It was 2.9% last November, 2.7% and 1.0% in August and July and -0.6% in January 2012. The quarters of 25% and 30% growth in exports are long past though the18.9% rate in the first quarter was the best since the third quarter of 2011.

The Chinese economy is export dependent. If goods exports do not prosper it is difficult for the economy to thrive. With one month to go in the second quarter exports are expanding at a 7.9% yearly pace. If this continues it would be the slowest quarter but one out of the last five, hardly a base for a strengthening or even static GDP.

Annual imports fell 0.3% in May far below the 6.6% forecast and the 16.8%surge in April. Imports expanded 5.2% in 2012 and 25.3% in 2011.

In China many factories serve as assembly platforms for imported components. As with the export numbers variation is not uncommon and a drop does not mean that Chinese factories are planning an immediate cut in production. It is difficult to determine the extent of component and raw material stockpiles in the country. But if imports are declining one cause is likely that Chinese factor managers are unsure of the future demand for their goods and taking the precaution of running down component stocks before they import more.

Producer prices are another warning sign. They declined 2.9% in May, steeper than the 2.6% April drop from a year earlier. Deflation at the producer level is now 15 months old.  Prices do not fall unless demand is dropping or oversupply is cheapening goods. Neither is a characteristic of a strongly growing economy.

Fixed asset investment, the 'facts on the ground' of Chinese manufacturing and a staple of economic growth dropped to 20.4% in May from 20.6% the previous month and a 21.4% average in January and February. Investment in new projects skidded to 15.4% in May from 17.9% in April. 

Bank loans have traditionally been the vehicle for enacting the central government's expansion directives in the economy at large. But the Beijing government is attempting to curtail the volume of new loans coming out of local governments, the banking sector and the so-called shadow banking system, and to halt speculative price increases in the property markets.

Industrial production was also sub-par in May rising 9.2% on the year, below the 9.4% prediction and April’s 9.3% pace. That is down from an 11.5% average in 2011 and a 10.3% average last year.

Many analysts have lowered their estimates for second quarter Chinese growth to between 7.0% and 7.5%, the Chinese government's official prediction for the quarter.  

Chinese domestic demand is inadequate to keeping the production machine operating at capacity and unemployment at bay.  The Beijing government seems to have recognized the danger of overdevelopment in factory production and speculative investment in property.   Without a strong recovery in the Europe, America and maybe Japan China will need several quarters of sub-par growth to work off the investment excesses of the past several years.  

Joseph Trevisani

Chief Market Strategist


Charts: Bloomberg

ScreenHunter 1275 Jun. 10 14.49

ScreenHunter 1276 Jun. 10 14.50

ScreenHunter 1278 Jun. 10 14.52

ScreenHunter 1279 Jun. 10 14.53


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