From Nomura, with our emphasis:
According to today’s official People’s Daily [link here and Bloomberg writeup here], an “authoritative” person who was not identified indicated that China should not support growth by adding leverage. “High leverage will lead to high risk; if not well controlled, it will lead to systemic financial crisis and negative growth”. Considering China’s severe structural problems, this “authoritative” person believes that “China’s economic growth trend in future should be ‘L-shaped’, rather than ‘U-shaped’, not to mention ‘V-shaped’”, which suggests that growth will trend lower. This individual believes China should avoid using strong stimulus to raise investment growth in the short term, as it would create larger problems later. For now, the most important thing, in this person’s view, is to push forward supply-side reforms (i.e., cutting over-capacity, reducing property inventory etc.) and actively but steadily reduce leverage.
Paul Donovan’s team at UBS was one of the first to highlight the recent trend towards deglobalisation, but also how the phenomenon links into the capital flow reversal story.
It’s a big deal. We think. (So much so, we’re planning a dedicated panel on the topic at this summer’s Camp Alphaville, so do watch this space).
The trend, in any case, is certainly not subsiding (as yet). On Thursday, Donovan and co. were back with a note explaining why.
There make three core observations: Read more
Want to know a big difference between Chinese and Indian GDP stats?
Well, we don’t think many Indian officials would say things like this, via China Daily:
Several local officials in China’s Northeast region sought to explain dramatic economic drops in their areas by admitting they had faked economic data in the past few years to show highgrowth when the real numbers were much lower, Xinhua News Agency reported on Friday.
“If the past data had not been inflated, the current growth figures would not show such a precipitous fall,” one official was quoted as saying.
The report cited several officials in the region who acknowledged they had significantlyoverstated data ranging from fiscal revenue and household income to GDP.
Irony thy name is fudged Chinese data.
And it’s not, we hasten to add, that Indian GDP stats don’t have their own problems — they do — it’s just that the lack of really strong centre out (and back in) incentives make us think the problem isn’t systemic so much as statistical. Read more
INDIA CLOCKS IN AT 7.4 PER CENT REAL GDP GROWTH AND IS NOW THE WORLD’S FASTEST GROWING BRIC ECONOMY!
Sorry. Got carried away by charts like this one from BofAML:
Goldman’s updated activity indicator sees Chinese growth at roughly 5 per cent, way off the official figure of 6.9 per cent. Awkward.
From Bloomberg, our emphasis:
Premier Li Keqiang highlighted a minimum growth estimate for China in the coming five years that could indicate the leadership’s readiness to accept the weakest period of expansion since the economy was opened up three decades ago.
The nation needs annual growth of at least 6.53 per cent in the next five years to meet the government’s goal of establishing a “moderately prosperous society”, Li said in an October 23 speech to Communist Party members, according to people familiar with the matter who asked not to be named as the remarks were not public.
We’re not quite sure what actually passes for “tail risk” these days. Yes, in an ideal world the phrase would be used purely to describe those unforeseen, immeasurable risks that are, err, unforeseen and immeasurable. As Felix wrote before, “if something has a 25 per cent chance of happening, it’s not a tail risk any more, it’s just a risk. ”
But this isn’t an ideal world and “tail risk” is now basically used to describe really dangerous but acknowledged things — like a Chinese hard landing — and it seems kinda annoying to be too pedantic about it.
So, with that in mind, what does this count as? Read more
Noted China bear Zhiwei Zhang, once of Nomura and now at Deutsche, is talking up China’s near-term economic prospects.
The reason? He thinks its fiscal slide — predicated on falling land sales which accounted for 22 per cent of general government revenues in 2014 — has come to an end.
You may remember this, from Zhang, in January:
This year, China will likely face the worst fiscal challenge since 1981. We believe this is the most important risk to the economy and one that is not well recognized in the market…
By Christopher Balding, Professor of Economics at Peking University, HSBC Business School, and blogger at Balding’s World. The TL;DR of this post might be that rebalancing the Chinese economy without a hard landing will be… difficult. Read more
From Credit Suisse’s James Sweeney and team: Read more
I don’t know what you want to call me. Santa Claus is what, eh, [journalist x] called me earlier. You want to call me a hawk.. I don’t know. I don’t go by these things. My name is Raghuram Rajan and I do what I do.
- The RBI governor, 29 September
And yes, that’s certainly A reason for why he cut the policy rate 50bps to 6.75 per cent on Tuesday, twice what had been expected.
Here’s another one, via Credit Suisse’s Neelkanth Mishra: Read more
By Christopher Balding, Professor of Economics at Peking University, HSBC Business School, and blogger at Balding’s World.
Throughout the Chinese stock market run up and subsequent collapse, the most fundamental question revolved around the robustness of the overall economy. Read more
Only 20 per cent or so of investors polled by BofAML thought that Chinese growth was even approaching the official 7 per cent, ignoring the National Stats bureau’s claims that the figures for Q2 growth “objectively reflect the real situation.” Read more
As above, we got a 7 per cent print for Q2 GDP growth in China last week. Here’s the breakdown from CreditSights — do note the weakness generally vs the contribution from the financial sector. As CreditSights say “The finance sector’s contribution grew by over 20% in 1H15 this is no thanks to the banks and more likely due to profit growth at securities firms and possibly asset management companies. In contrast, the industrial sector, which contributes over a third to GDP, is growing at under 2% YoY.”
Of course, it’s real (ish) activity but it most probably isn’t going to be repeated at that level and without it GDP would have been down closer to 6 per cent, according to UBS.
Which is all interesting stuff, but it’s not why we’re here. Read more
Quite obviously, not many people take China’s own statistics at face value.
Also quite obviously, China is a hard economy to accurately measure anyway. It’s really quite big and its pace of change has made grasping any bit of it for very long more than difficult. Read more
UK chancellor George Osborne has announced new budgetary rules that aim to eliminate the current structural deficit within three years and ensure public sector net debt is falling as a share of national income by 2016-17.
Key to the new vision is a budget surplus by 2017-18.
But as the FT’s Martin Wolf warns on Friday:
…the focus on public debt alone is mistaken. Crucially, it ignores the asset side of the balance sheet altogether. Moreover, other things being equal, the bigger the fiscal surplus, the lower interest rates would be. If that encouraged a run-up of private debt, the economy might end up yet more unstable. Alas, the Office for Budget Responsibility already forecasts a big jump in household debt.
Have a chart Credit Suisse’s Neelkanth Mishra put out back in 2013, the same Neelkanth Mishra who has been arguing persuasively that if “activity in informal industries and rural areas were properly measured, India’s GDP would look bigger and more stable”:
Standard deviation of reported quarterly GDP growth of India is second lowest only to China, you say? Read more
Apple just reported the biggest quarter of net income earned by any public company ever, at least in nominal terms. It remains the world’s most valuable publicly traded company by a large margin. So naturally there are people who want to put these statistics into perspective by comparing a corporation to a country. Unfortunately, most of those efforts miss the mark because they generally don’t compare apples to apples.
The most common way to measure the size of an economy is to look at how much stuff is produced in it each year. (This is GDP.) You might think that is equivalent to corporate revenues, except that a lot of those inflows are offset by outflows to suppliers. In other words, you’d be looking at a company’s GDP without subtracting the imports that represent foreign production. That’s double counting. Read more
What you think of the new one will probably depend on what you thought of the old one. For many people “not much” seems inadequate.
From Capital Economics’ Mark Williams on the likely Tuesday announcement of an upward boost of up to 10 per cent to the Chinese government’s estimate of the size of its economy (our emphasis): Read more
We had feared that one of most famous of Chinese statistical quirks might have abandoned us forever.
The reported combined GDP of China’s provinces came in only slightly above its national GDP in the first quarter, amid reports that more than 70 smaller Chinese cities were dropping GDP as a performance metric.
Perhaps as China stopped evaluating its local government officials on a narrow GDP basis, the officials would stop doing the obvious and fiddling their GDP numbers.
That would in turn stop the sum of China’s regional GDPs always coming in ahead of the national figure… as well as helping with things like unequal income distribution, problems with the social welfare system and environmental costs. Read more
Germany shrank, and France stagnated in the second quarter. Italy we’ve all agreed not to talk about until Matteo Renzi waves his magic liberalisation wand, right? Here’s the FT:
The data from the currency bloc’s two largest economies came as the embattled French government said the disappointing growth meant it would miss its budget deficit this year and halved its gross domestic product forecast for 2014.
Germany’s economy, which provides more than a quarter of the euro area’s output, shrank 0.2 per cent between April and June, according to official figures. The French economy recorded zero growth during the period.
The current level of income inequality in the U.S. is dampening GDP growth.
At least, that’s the conclusion of a new report from S&P Capital IQ. There’s a lot to digest in this exhaustive summary of existing research, including a bunch of interesting data on educational attainment and research on political frictions in times of extreme inequality. But the core argument is driven by a simple relationship: while many people tend to spend most of their earnings (and often more than they actually earn) on goods and services, those who make a lot of money spend a large share of their income on financial assets and property. As more and more of the country’s income shifts upwards to a smaller subset of the population, everyone else is deprived of spending power at the same time as more capital is available to invest. Read more
Let’s peer into the nearish future for the world economy.
Here’s a refreshingly different view on China, courtesy of Karen Ward, senior global economist at HSBC.
Her key point: it’s not that China is necessarily over-investing (as is frequently argued) but that the rest of EM may be under investing. Read more
There’s an interesting debate going on between Steve Randy Waldman, Karl Smith, Scott Sumner, Evan Soltas, Mark Sadkowski (and more).
It started when Waldman proposed a simple but elegant argument that the 1970s great inflation period may have driven not so much by expansionary monetary policy but rather population demographics: namely the baby boom and the entrance of female workers into the economy. Read more
This is what $560bn or so of newly-discovered US economic output looks like.
Yes it’s the latest BEA estimates/revisions of US GDP.
They’re out – and with 1.7 per cent growth in 2013′s second quarter, and 2012 growth revised up to 2.8 per cent from 2.2 per cent at the last estimate, they’re fairly good. Read more
Deutsche Banks’ China economics analysts are pondering why their forecast for 8.5 per cent growth next year is well above consensus (and even well above the IMF’s 7.7 per cent and the World Bank’s 8 per cent).
They have come up with a list of reasons why everyone else might be overlooking some positive possibilities for future economic growth. We’re not sure if we agree, but bear with us (haha) anyway. Read more
Stephen Roach recently wrote for Yale Global Online arguing that yes, rebalancing is happening, but the new leadership have it under control because they are enacting the necessary reforms to facilitate this transition.
A quick look at the composition of second quarter growth statistics suggests that is not happening — at least not now. Read more