Analyzing Chinese Growth

The world was aflutter when the Chinese National Bureau of Statistics announced GDP growth of 7.3% beating expectations of 7.2%.  While focused on the difference between the .2 and the .3, others chose to herald the rising power of the consumer in driving Chinese rather than investment.

What most analysts seem to be overlooking is whether there is any actual accuracy to these numbers.  First, we know that the Chinese NBS has a long history of manipulating official statistics.  Can anyone claim that urban Chinese housing price inflation was 6% total from 2000-2011 with a straight face?

Second, all signs point to a decline in industrial activity.  Steel production was essentially flat and grew at a tepid 3.8% well beneath GDP.  Others have noted that electricity and other forms of energy have essentially decoupled from Chinese GDP growth recently.  This implies that either the entire structure of the Chinese economy has changed, in macroeconomic terms, overnight or Chinese economic activity is not as robust as officially reported.  While it is too early to draw firm conclusions, given the relative speed with which energy and GDP decoupled and the lack of change to the economy, it seems more likely that there is underlying weakness that is not being reflected in official data.

Third, while some have even used the recent data to herald the rise of the Chinese consumer, official data stands in stark contrast to all other reports about Chinese consumption. Whether it is luxury cognac makers or domestic beer makers, companies across industries have been reporting weakness in Chinese sales.  Foreign cognac and Chinese beer makers are two examples but there is simply no evidence from company reports that indicate the Chinese consumer market is suddenly bursting forth to make up for a decline in investment and heavy industry.  Large number of both Chinese and foreign businesses are talking about a consumer slow down and their sales reflect that.

This leaves a very simple scenario.  Industrial activity is clearly slower and most companies are reporting sales described as soft, but somehow the official statistician is declaring results that beat expectations.  Given what we know about the history of Chinese data, it might be worth it to carry a healthy skepticism about the official data.

There simply is no independent data from either the corporate/industrial sector or the consumer side to support the idea that Chinese GDP beat expectations.

Note: I was interviewed by the Dutch newspaper Het Financieele Dagblad where I said it is more plausible that GDP growth is 2-4% lower than official data reflect.

 

Things Seem to Be Getting Interesting

My apologies for being quiet for so long.  I have had a lot on my plate with unrelated projects and unable to focus on writing for the blog.

I have been prompted to write more given the interesting developments in the Chinese economy among other things.  There are two stories that I wanted to touch upon that are both unrelated at the same time.

First, despite a publicly positive economic outlook from Beijing and the PBOC, the economic fundamentals are much more stressed.  Money is flooding out of China as the anti-corruption (political enemy purge) continue to gain steam.  This puts pressure on weak businesses that have relied on bank lending to fund never ending expansion with little expectation of being repaid.  Despite repeated disavowals, Beijing is pushing a series of unofficial stimulus that are beginning to approach the 2009 orgy of debt and spending. It seems strange if the economy is so good as claimed, that new projects are being announced and existing projects being sped up.  Central banks don’t injects hundreds of billions of RMB into banks if they are healthy.

Second, this pressure is manifesting itself in businesses that have seen nothing but expansion and raising serious questions about the official finances.  Kaisa, a real estate developer in Shenzhen, missed a coupon payment on a 2020 bond.  What makes this case interesting is that they supposedly have 9 billion rmb in cash and missed a 120 million rmb payment.  While they have a waiver to pay the required amount within a 30 day period, after which they would be in technical default, this raises serious questions about the real state of finances beyond the official books.  Considering most of their projects have come to halt with even routine approvals being denied, many suspect there is something more serious.

Given that little is straight forward in financial and economic matters in China, these two seemingly unrelated events are raising concerns.