China’s economy is slowing down but we are still unsure by how much

Earlier this morning came a piece of news which was to say the least eagerly awaited. As more and more data has emerged from China’s economy then more and more fears have arisen about a growth slow down. As China has been a main engine of world economic growth in recent times and a heavy consumer of commodities this poses problems way beyond her borders.

The figures

China’s National Bureau of Statistics discussed these as follows in its press conference.

The first quarter GDP growth of 7.7%, and in the first half growth of 7.6%…And second quarter growth was 7.5% , down only slightly, five consecutive quarters of economic operation in 7.4% -7.9% range, operation is relatively stable.

The message everyone was supposed to take was one of stability which is emphasised again here.

we can see that the whole economic operation is smooth

This conveniently ignores the fact that reported Chinese economic growth has been on a downward trend for a while now. But even more conveniently it is exactly in line with its target for 2013. However for all the official talk of stability and smooth operations if we project further declines for the rest of 2013 then the target will be missed to the downside which would be for the first time for 15 years. Amazing is it not how centrally planned economies manage to apparently hit their targets so regularly?

This would be a particular challenge now as the quarterly growth rates in 2013 have been 1.6% and now 1.7% which if repeated in the second half of the year would leave economic growth in 2013 below 7%.

This may have been why China’s Finance Minister Lou Jowei talked of 7% growth and went onto suggest thst even 6.5% growth would not be a “big problem” although the official news agency Xinhua converted such talk to this over the weekend.

There is no doubt that China can achieve this year’s growth target of 7.5 percent.

What about trade data?

It was only last week that China had posted disappointing numbers for her trade position. The data for June showed a year on year contraction in export volumes of 3.1% and a contraction in import volumes of 0.7%. So the impact on economic growth would have been negative. Also such numbers provoke thoughts about how such an apparently fast growing economy could import less.

As ever one month’s trade figures are (very) unreliable but such numbers will have everybody scanning the next few releases. If you believe that the trend is indeed your friend then there is only one way of interpreting this.

 It (foreign trade) grew 13.5 percent in the first quarter year on year and 4.3 percent in the second quarter, but just 0.3 percent in May and now a 2 percent fall in June.

How did China grow so fast then?

If we look into today’s numbers we see that exports/trade contributed only marginally to economic growth in the first half of 2013.

Net exports of goods and services GDP growth rate was 0.9 percent , so that GDP rose 0.1 percentage points (from this component).

That only leaves 7.4% of the 7.5% to explain! Stepping into the gap was a surge in investment which was as convenient as it was strong.

Gross capital formation on GDP contribution rate is 53.9 percent , creating GDP growth of 4.1 percentage points (from this component).

The remaining component was consumption which contributed 3.4% to the GDP growth.

So just as the impact of trade dipped away (from 1.1% to 0.1%) on economic growth then investment stepped up and took up the slack. Good this command economy business is it not? Although many may be reminded of this from the man who is now Prime Minister. From Wikileaks.

All other figures, especially GDP statistics, are ‘for reference only,’ he said smiling,” the cable added.

Mind you that critique also applies these days well beyond the Chinese borders I think.

Industrial Production and Retail Sales

This confirmed the downwards trend evident above. From Xinhua

In June alone, the industrial value-added output increased 8.9 percent year on year, decelerating 0.3 percentage points from the growth in May.

I guess it will take some time for all the extra investment to bear fruit and such a number compares with a 10% growth rate for 2012.

By contrast retail sales put in a stronger performance.

In June alone, retails sales totaled 1.88 trillion yuan, up 13.3 percent year on year, marking the fastest growth since the start of the year.

This means that they have risen at an annual rate of 12.7% in the first half of 2013.

However this is in spite of the fact that income growth is weakening as this question at the press conference identified.

we know that this year China’s urban residents per capita income growth is 6.5% , but in the last year was 9.7%, so there has been a 3.2 percentage points fall.

The questioner goes on to point out that previously income growth had exceeded economic growth but was now below it. This has clear implications for both retail sales growth and overall economic growth going forwards as well as making us wonder exactly how retail sales growth is so strong.

What about electricity consumption?

As doubts have spread about the official data, more and more eyes have turned to the power consumption figures to see if they are contradictory. Here is today’s release from Xinhua.

June, total electricity consumption 438.4 billion kwh, an increase of 6.3%……    January to June, the national total electricity consumption total 2.4961 trillion kwh, an increase of 5.1%.

As we note that these are below the economic growth numbers we also need to remind ourselves that these are also official numbers.

Credit Growth

This has been a troubled area for China as I discussed on the 24th of June. We will have to see how this plays out but Friday’s release from the People’s Bank of China did hint at what is going on.

June, the inter-bank lending market weighted average interest rate of 6.58 percent, 3.66 percentage points over the previous month; pledged repo weighted average interest rate was 6.82%, 3.81 percentage points over the previous month.

This is pretty much how the imperialist capitalist lackeys plunged themselves in to a credit crunch. The numbers have improved so far in July but this is a watch this space situation going forwards and the  3 month Shibor is at 4.67%.

Comment

It is important to review these numbers in the light of the fact that both China’s growth numbers and her trade data would be grasped with both hands by virtually any other economy in the world. But that does not mean that it is plain sailing. Indeed viewers of BBC’s Top Gear television programme were reminded of some of the issues. As they zoomed around in high speed sports cars in a petrolhead manner in Spain they found an empty airport,a road to nowhere and empty housing estates. Such a theme also applies in China which returns me to a theme of this blog. Whilst producing something is counted in economic output it is my opinion that actual use of it should be factored into the statistics. Otherwise not only is there economic waste but the “growth” is misleading.

As for the rest of 2013 and into 2014 I expect there to be more growth slow downs in China which will affect those dependent on it. Which returns us to the question of where world economic growth is going to come from?

 

 

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  • JW

    Hi Shaun
    The Chinese realised the ‘world’ was looking at their electricity numbers, and hey presto , from somewhere in the 2% growth level they have suddenly jumped much closer to the GDP numbers.
    Also China counts in its GDP numbers stock lying in warehouses which may one day be used in that ‘investment’ bubble.

    Mickey mouse numbers for a looking glass world ( what a mix!)

  • jan

    As a non-economist I’ve never understood this concern for growth by economists. From the earth’s point of view we all need to consume less if the earth is to support the growing numbers of people. So personally I would see it as a good thing if the growth in China is going down. There are so many people in China all wanting a western lifestyle with all the vast consumption that entails. However in terms of happiness and contentment consumerism doesn’t work (read Affluenza by Oliver James for proof) and many in the west are now realising this. We are at a turning point where the old economics doesn’t work any more.

  • Mike from Enfield

    Hi Shaun,

    When you put it like that, yes it does look very suspicious the way all the figures come nicely together to get the correct answer. Not however suspicious enough for the mainstream media – see for example today’s article on the BBC website on the same subject, where there is no suggestion that there could be any pork pies or even inaccuracies involved.

    When the dominant inputs to ‘the markets’ are dodgy data like this plus overt government manipulation, it seems unlikely that such a system could be remotely stable or sustainable. However for as long as it continues to provide the lucky 1% with a mechanism to enrich themselves, nobody (much) is complaining and it barely seems to matter about the underlying assets the markets supposedly represent. As JW has already said, Mickey Mouse through the looking glass indeed.

  • forbin

    well I have noticed that the standard of BBC journalism has deteriorated to just a bunch of copy & paste artists with a few scribblers thrown in !

    quote from HHGG ” …and nobody complained , well at least nobody of any importance…..”

    it is with growing unease I watch the distortions in the “free” market, which to work correctly require accurate and open information , grow into a new bubble or bubbles or just out right fraud .

    Forbin

    PS: there’s little to do except take your popcorn to your seat and watch the show……

  • forbin

    to be honest Shaun you’re right , most western government would die for 7%+ growth

    but some time ago I realized that all this meant was our economy would double in size in 10 years .

    we’ve had about 3% , about the same as France , so with or with out unions but that’s another story

    so now we have China with “7.xx ” growth rate -

    1, CO2 from 2008 figure of 23.5% to 47% ? doesn’t mean much but that’s 7 billion to 14 billion tonnes – in 10 years

    Climate change? well if there’s enough coal and oil , so coal then….

    2,coal consumption – 3.9 billion short tonnes to 7.8billion ( 2012) ( 2.9 Billion Tonnes 2008 ) ( china now inports coal – notably Australia , they tax local consumption but exports are not – WTF ? it still gets burnt!! )

    I won’t go on but if basic maths tells you that what cannot go on , will not …

    Forbin

    PS: Oh I just love this on the World Coal Association web site

    “It has been estimated that there are over 861 billion tonnes of proven
    coal reserves worldwide. This means that there is enough coal to last us
    around 112 years at current rates of production”

    Note the Honey Words – current rate of production !! that means NO GROWTH !!

    theres more but the rest of the readers can look this up themselves

  • Midge

    What are the HSBC flash figures telling us about China and how relevant are they?

  • Anonymous

    Hi JW

    I was wondering that myself about the electricity numbers…

    As to the GDP report they seem to produce it with amazing speed and accuracy. Only a fortnight after the end of the quarter we have the number which as I sit here I am trying to recall a revision of.

    Yet we in the UK take not far off twice as long (25 days after the end of the quarter last time) and are subject to often substantial revision. I guess it is just capitalist imperialist weakness and incompetence.

  • Anonymous

    Hi Jan

    You make a good point. In our present state we need some economic growth to help us with our debt problem. But more generally it is politician’s I think who drive the “growth” agenda so that they can make promises and bask in the reflected glory. Unfortunately many members of my profession are happy to feed that agenda as you suggest.

  • Anonymous

    Hi Mike

    As the numbers in China are produced so fast one could argue that much of the data cannot actually be available. For example when we get the UK’s own version -which is in Western terms fast- we only have around 40% of the data and regularly revise it.Yet China a much larger and less homogenous country can apparently do so much better…

  • Anonymous

    Hi Forbin

    Perhaps the Chinese authorities are thinking along the same lines. From the Wall Street Journal.

    “BEIJING—China raised its 2015 target for solar-electricity capacity, giving a shot in the arm to solar companies that are struggling because of industry overcapacity, weaker global demand and overseas trade disputes.

    Installed capacity for solar electricity should reach more than 35 gigawatts by 2015, up from about seven gigawatts last year, China’s State Council said in a statement posted Monday but dated July 4. China’s previous target was 21 gigawatts.”

  • Anonymous

    Hi Midge

    Here they are.

    “HSBC China Composite PMI™ data (which covers both manufacturing and services) signalled the first contraction
    of output in ten months in June. That said, the rate of
    reduction was only fractional, as signalled by the HSBC
    Composite Output Index posting slightly below the 50.0 no change mark at 49.8 (down from 50.9 in May).”

    So no growth at all in June and in fact a slight contraction. It is the biggest gap I can think of between such a business survey and the official numbers. Are the surveys perfect? No as for example Ireland showed for manufacturing last autumn or on a more minor level the UK’s manufacturing in May. But that wrong? Unlikely…

  • JW

    Oh God, Forbin, next you will be saying its hot at the moment because of Global Warming/Climate Change/ high CO2 levels.
    Its Hot because its Summer, its the weather you know. Its only a couple of weeks since the Met Office was warning of a wet cool summer because the melting ice caps were forcing the gulf stream south, the day afterwards it flipped back north and we got summer weather.
    As long as you put scrubbers on coal-fired power stations to get rid of SOX, NOX and particulates ( sooty carbon), there is nothing wrong with this sort of electricity generation. Indeed no-one has yet found a more responsive type of generation for load following in mid-merit. The Chinese are installing solar and wind to support their manufacturing output, it is doing nothing to enhance their electricity supply, for that they build coal plant.

    If I put Mickey Mouse together with Climate Change in the same sentence I would be doing a great disservice to the mouse.

  • Noo 2 Economics

    Interesting stats and comments. What I take friom this is that China’s exports only account for 10% of it’s GDP, I thought it was more?

    The investment surge seems to explain the PBOC’s reluctance to interfere with liquidity tightening in June as they try to cool down investment (which they agreed to do with the IMF).

    “This means that they have risen at an annual rate of 12.7% in the first half of 2013.

    However this is in spite of the fact that income growth is weakening as this question at the press conference identified.”

    Maybe the Chinese are catching the Western disease of borrowing which would explain ongoing credit growth through the first 5 months of this year which the PBOC is trying to get under control through (amongst other things) refusing to step in when liquidity goes through it’s seasonal summer tightening?

    I do find this laughable:

    “we know that this year China’s urban residents per capita income growth is 6.5% , but in the last year was 9.7%, so there has been a 3.2 percentage points fall.”

    So, with apologies Shaun, in these bizarre times in which we live, up is the new down! Another one for your lexicon.

    About electricity consumption, why does everyone think that GDP growth must mirror electric consumption? Is it not possible that more efficient machines could now be employed to produce more for the same electric usage? Don’t our fridges, TV’s etc consume substantially less electric now than they did 10 years ago? Is it not the case that the Chinese probably still use antiquated machines ansd processes so as they buy new machinery this will result in immense productivity gains for the same amount of resource usage?

    It looks like growth will be dependent on the Chinese consumer for the rest of this year and given lower wage growth rates, that will have an increasing dependency on how much s/he wants to borrow against the back drop of the PBOC steadily tightening credit in an effort to slow credit based investment to prevent overheating. China has emerged, it can longer post double digit growth figures withiout going through violent boom bust cycles.

    I am posing these questions for consideration, not presenting them as truths as I am sure the numbers are unfortunately subject to probably more manipulation than ours, but I am asserting that they are not being manipulated to the extent that fairy stories are being told. If they are, China will crash in the next 12 months.

  • Noo 2 Economics

    Forgot to say by “crash” I mean crash in the true sense – the economy will shrink, not just grow less.

  • Eric

    Isn’t it more than just debt, Shaun? I’ve always presumed that growth is necessary to enable a continued improvement is social living standards. Without growth our ability to provide better healthcare, transport infrastructure, defence etc, etc, is limited.

    However, I think our current problems are exacerbated by a (monetary) policy that seeks to drive growth by borrowing. The MPC don’t seem to care where consumers get their money from so long as they spend it on houses and consumables.

    Or am I mistaken?

  • forbin

    hello JW,

    I think you’ve missed the point and also I said “if there’s enough coal and oil” …….

    the point is that there is in my opinion , from data published , not enough coal and oil for China to become a 2nd United States. ( close to European levels is a possibility)

    For how long is also an issue – ask any oil man or mining company and they will tell you the resource depletion issue is always on their minds – Wall street marks their shares on that metric .

    the ins and out of climate change are too long and get too personel to go into here – I see my mistake was mentioning it at all when my focus was on resources ( and prices thereof).

    a correction to you statement about Coal fired stations response times – yes there is a better option – gas. Its why we have a mix of coal fired ( like nuclear – used for steady load) and gas fired ( along with a little Hydro ) for peak loads , we also suprisingly buy nuclear electricity from France and it works when the wind doesn’t blow as well.

    As for China I see they are power hungry and coal fired stations for a country that had lots of coal is a must. Also they building everything else they can .

    Going back to the UK problem , I agree we are daft to close our coal fired stations , it cheap and relativly clean with the scrubbers

    but most of all regardless of what you believe of climate change – us cutting a few power stations whilst China builds two a week , is a futile gesture to say the least – and will result in power cuts here if we’re not careful

    Forbin

  • Anonymous

    Maybe the Chinese numbers are planned in advance, and copied from the 5 year plan …..

  • JW

    Forbin
    A comment on mid-merit load following. You are describing open-cycle gas fired plant which with pump storage hydro is used for peak loads. Nuclear is only base load, you can’t turn this up or down ( unless you want a hot mess). Mid-merit is where the donkey work is done following the normal daytime shifts in demand second by second. Combined-cycle gas turbines ( CCGTs) are pretty good, but not as good as coal fired ‘kettles’. Its pretty amazing how you can get older coal plant to almost stand on its head to follow fluctuating demand. After decades of trying nothing really does the job as well.

    Sorry if I sounded caustic, bad day yesterday, I really enjoy your posts.