It’s only a week since Wen Jiabao rocked the world (well, parts of it) by unveiling a GDP growth target of 7.5 per cent target after six years of keeping the target at an auspicious 8 per cent. The reduction has been seen as an admission that the country’s economy must rebalance away from its extraordinarily high investment/low consumption mix, and that this will entail a slower growth rate. That rebalancing has been a stated — though little supported — objective for years, but growth nevertheless stayed well above 8 per cent, helped by massive infrastructure spending.
But has it already fallen below the 8 per cent threshold?
Of all the data out of China last week and over the weekend, it is the industrial production numbers that have provoked a bit of pondering from strategists. The IP figure came in at 11.4 per cent, much lower than expected, and this made those relatively positive set of PMI figures for February look less encouraging.
From Goldman Sachs on Monday:
China’s IP print was clearly weaker than we had expected, although stronger than in the middle of last year. The outcome for IP was somewhat weaker than suggested by China’s two main manufacturing PMIs, which had edged up over the last two months and suggested overall macro growth was only slightly below trend:
China’s IP growth was 11.4% yoy in January-February (averaged to smooth out the impact of the Lunar New Year falling in January this year and February in 2011), or around 8% mom s.a. ann. This represents a sharp 10 percentage point (ppt) fall from December’s level.
While clearly weaker than we forecast, it still means that the sequential growth rate is a respectable 11.8% qoq s.a. ann. This is basically the same growth rate as in December, and 430 bp higher than the trough in the middle of last year.
Nomura’s China economist, Zhiwei Zhang, wrote on Tuesday that comments by a former minister suggest growth could already be below 8 per cent:
Li Yizhong, a former minister of industry and information technology, stated today while attending legislative meetings in Beijing that, “China’s GDP growth target of 7.5% this year will require only industrial production growth of 11%”.
IP growth and GDP growth are highly correlated in China. IP growth was 11.4% in Jan-Feb combined. Li’s comment suggests that GDP growth in China for the Jan-Feb period was likely only marginally higher than 7.5%, and below 8%, in our view.
Anyway, Zhiwei says IP growth for the Jan-Feb period was a significant downside surprise (11.4 per cent versus consensus of 12.3 per cent) and reiterates Nomura’s interest rate cut of 25bp in March and a reserve requirement ratio cut of 50bp in April.
And then there’s China ur-bear Gordon Chang, who says that the electricity production and shipping indicators point to a possible zero growth rate.
The statistics bureau reported that electricity production for the two-month period increased 7.1% over the same period last year. NBS combined the two months to eliminate the statistical distortions caused by the Lunar New Year holiday, which fell in January this year and February last year.
Because electricity output, the best indicator of economic activity in China, invariably outpaces the growth of gross domestic product, it’s apparent theChinese economy is expanding only in the low single digits.
China’s second best indicator is cargo shipments. The Shanghai port, the world’s busiest, reports that container throughput was up 3.6% and other cargo up 7.0% for the first two months of the year. China Eastern Airlines, the Shanghai-based carrier that is China’s second-largest, sees lower cargo demand at the moment.
Then again, China is very, very big. And as we noted above, those stated goals of rebalancing have come to very little so far, for what can broadly be called political reasons and vested interests. Those interests can work in all sorts of strange ways — and Reuters had an interesting story last week noting that the new national GDP target won’t necessarily change the behaviour of local authorities, who will continue to pursue higher growth rates for their own benefits:
But reining in and transforming the economy is particularly difficult in a one-party system where posting impressive growth numbers has been the only sure-fire way to achieve political promotion through the Communist Party ranks.
“Clearly they want to signal that they want to change the growth model. But to change the growth model, you need to do a lot more than lowering your growth target,” said Stephen Green, an economist at Standard Chartered Bank in Hong Kong.
“The system hasn’t changed. It’s still all about stronger growth, getting promoted on the back of growth,” he said.
So while most provincial leaders have trimmed targets to show support for the national leadership, the personal incentive to outperform keeps them well above Beijing’s mandated rate.
So, too, does the need to generate revenue to pay back 10.7 trillion yuan in local government debt.
Ah, the local government debt. That’s one way, perhaps, that the central government could reign in those overly-ambitious provinces. But there’s not much sign of that just yet.
World’s changed man! World’s changed! China edition – FT Alphaville
China gets some can-kicking practice – FT Alphaville