China’s trade data for April came in well short of expectations on Thursday, and was followed by a raft of more disappointing data on Friday.
Here are a few highlights, courtesy of BAML’s China economists Ting Lu, Xiaojia Zhi and Larry Hu:
The analysts consequently cut their Q2 GDP growth forecasts from 8.5 per cent to 7.6 per cent.
What about those official PMIs, which have been in expansionary territory and rising for five months now?
Well, really, who knows? But these charts by AlsoSprachAnalyst show that the divergence between the industrial production data and the PMIs is something that hasn’t been seen very often in recent years:
Meanwhile electricity production fell off very sharply in April, and that’s a measure which does tend to have a reliable correlation to GDP:
There’s no shortage of anecdotal evidence that China’s official PMIs and GDP growth figures are not reflecting the real picture. For example, from the New York Times on Friday:
In a series of interviews over the last week, bankers and senior executives from provinces all over China, in a range of light and heavy industries, cited a broad deterioration in business conditions. Two of them said that some tax agencies in smaller cities had been telling companies to inflate their sales and profits to make local economic growth look less weak than it really was, while reassuring the companies that their actual tax bills would be left unchanged.
Or, see what we wrote last month about a survey about social housing (one of the big hopes for new stimulus spending and growth) conducted by Standard Chartered.
Or take regional data, such as the table below via Anne Stevenson-Yang, who suggests that comparing year-on-year growth rate changes can be useful:
Industrial Output: YoY Growth Province 2011 (Jan-Feb) 2012 (Jan-Feb) Guangdong 13.3% 5.0% Zhejiang 12.5% 2.9% Jiangsu 14.4% 11.0% Shanghai 13.9% 4.0% Beijing 9.0% 2.4% Shandong 13.0% 11.1% Liaoning 16.2% 11.4% Exports 2011 (Jan-Feb) 2012 (Jan-Feb) Guangdong 36.9% 0.7% Zhejiang 14.5% 2.5% Jiangsu 15.3% 2.8% Shanghai 11.3% 9.4% Beijing -5.4% 8.5% Shandong 25.6% 4.7% Liaoning 13.3% 24.0%
Again, it’s difficult to see how growth rates of 8.1 per cent were achieved in the first quarter of 2012, if these figures are even a loose approximation of the direction and speed of growth.
In fact, even in official terms, it wasn’t. Patrick Chovanec of Tsinghua University pointed out to us that China’s GDP growth is given as a year-on-year figure where the norm for most countries is to report annualised quarter-on-quarter growth rates. Such a figure would actually be 7.4 per cent for China in Q1; not the 8.1 per cent that is talked about.
And as Chovanec described, there are signs of a disconnect within the top-line official data itself. Read this reporting from China Daily, based on comments from National Bureau of Statistics spokesman Sheng Laiyun which were well covered in the local press:
Meanwhile, investment – previously the strongest driver of China’s economy – contributed 2.7 percentage points to growth, less than the 6.2 percentage points contributed from consumption, the NBS said.
So, of the 8.1 per cent GDP growth in Q1, the NBS claims 6.2 percentage points were consumption based and 2.7 percentage points were investment (another 0.8 percentage points was “drag” from net exports contracting). The consumption:investment ratio of that growth, with consumption at around 70 per cent of the total, is radically different to what China has seen in its total GDP in recent years, where household (private) consumption alone has been as low as 32.8 per cent and total consumption is just under half of GDP.
Meanwhile, the retail sales simply do not support this argument, as Also Sprach Analyst pointed out last month:
So, retail sale growth is decelerating; both in real and nominal terms, according to Chovanec. Perhaps, then, the government is stepping in to boost that proportion of consumption? But as he points out, the retail data includes government spending, so that only leaves services. And, he says, there is little sign that government spending on services is rising rapidly.
Let’s look at an excerpt from Martin Wolf’s column of April 3, in which he outlines a scenario for China to “rebalance” over a period of 10 years, with 7 per cent GDP growth per annum:
Suppose that China were to grow over the next decade at the still high rate of 7 per cent a year. Suppose, too, that investment (including investment in inventories) fell from 50 per cent of GDP to a still very high 40 per cent, because a smaller rate of investment is needed to support lower growth. Suppose, too, that the external surplus remained 3 per cent of GDP. To achieve the expected 7 per cent GDP rate of growth, consumption (public and private) needs to grow at a real rate of 9 per cent while investment grows at 4.6 per cent. This would be an astonishing reversal. It would be impossible, without a big shift in the distribution of income towards households. That, in turn, would require comprehensive reforms in the financial system, in corporate governance and even in the power structure of the country.
Martin’s comments about the likely drastic side-effects of such a rapid rebalancing are not too surprising in the context of what might be needed in order to achieve said rebalancing. Look at Michael Pettis’ recent description of rebalancing scenarios for example; some of them are not pretty. All of them require a slowdown in the rate of growth of the state sector that will be difficult for those in power to swallow:
In my opinion this change in the growth rate of the state sector will be at the heart of the political economy choices, and difficulties, that Beijing will be forced to address in the next few years. It is likely to be much easier to keep political leaders happy when the value of the state sector is growing comfortably in the double-digit range than it is when it is growing in low single digits, or even contracting.
But let’s go back to the NBS comment that consumption made up a good majority of the GDP growth seen in Q1. What that would mean is that Q1 saw an even more rapid shift towards consumption-led growth than the scenario which Martin outlined, according to our calculations.
That “astonishing” scenario, applied to Q1 2012 GDP growth, would translate at about 5.9 percentage points of growth coming from consumption and 3.0 percentage points from investment; whereas the NBS states it the rebalancing is taking place at a still-more-astonishing 6.2 per cent consumption and only 2.7 per cent investment.
China’s rebalancing will not be automatic – Nicholas Lardy/East Asia Forum
A fate worse than a hard landing for China – FT Alphaville
Bloomberg: Inflated notions – Patrick Chovanec
Don’t be confused in believing there’s rebalancing in China – Also Sprach Analyst