Can 6% growth be better than 7%? Only in the upside-down world of Chinese statistics.
“China is still slowing,” said the headlines last week. At 6.1%, GDP growth was the lowest since 1992 and almost a full percentage point down from the previous quarter. But oddly, that’s a lot more encouraging than it sounds.
It’s quite likely that China actually grew faster this quarter than last, despite the headline numbers. Indeed there’s mounting evidence that the economy is past the worst and starting to pick up again.
However there are still plenty of risks ahead and we’re certainly not back in boom times yet even if China is handling the slowdown a lot better than many feared.
Measuring Chinese growth isn’t easy
First, let’s take a look at that GDP number. How can 6.1% be better than Q408’s 6.8%? It’s all down to the way China measures growth.
Most countries report GDP on a quarter-on-quarter, seasonally adjusted, basis. That means they measure the size of the economy in Q109 and Q408, calculate the change, adjust that for the seasonal differences (because economic activity is always higher in some parts of the year than others) and then report the result.
Some countries, such as the US, report this at an annualised rate – how much the economy would grow if it continued at the latest quarterly pace for a year. Others, including Britain, report the quarterly number and leave you to multiply it by four to make a like for like comparison.
But a number of other countries – usually developing ones – report growth on a year-over-year basis. That means comparing say Q109 to Q108. This is what China does. The problem is that year-on-year numbers reveal the underlying trend much slower than quarter-on-quarter ones. If you have a great first half and a poor second one, the overall number for the fourth quarter can still look fine even if the economy actually shrank when compared to the previous three months.
This is exactly what happened in the fourth quarter with China. We even had a number of pundits proclaiming the 6.8% figure as evidence that China fixes its statistics. That’s not impossible but it wasn’t the cause of the somewhat odd numbers this time.
How to interpret growth, Chinese style
In order to compare China’s growth to the rest of the world, you need to turn the year-on-year numbers into quarter-on-quarter ones. That isn’t easy. The quarterly series is very volatile, and usually features an enormous jump at the end of the year. As Li Wei and Stephen Green of Standard Chartered put it: “It is as though the statisticians throw all the data they failed to collect during the year into the Q4 number.”
What’s more, when the National Bureau of Statistics revises previous years’ numbers – which it did recently after discovering a previously uncounted chunk of the economy roughly the size of Peru – it doesn’t update the quarterly data. That doesn’t help. Finally, there is always the possibility that the data is being tweaked for political reasons anyway. All this makes calculating a true quarter-on-quarter series a hazardous process.
But economists still try. Inevitably, they don’t always get the same numbers – estimates for the fourth quarter ranged from –1% (outright contraction) to 5% (which is still effectively a recession for a country like China, since that rate of growth doesn’t create enough jobs for the expanding workforce). Nonetheless, the underlying trends tend to point in roughly the same direction. And for the latest quarter, they’re pointing to what looks like a strong pick-up.
The chart below for example shows estimates from UBS China analysts who reckon that growth picked up from 2%-3% in the second half of last year to almost 7% in January-March 2009 (and they forecast around 12% for the current quarter). Other analysts may disagree strongly about how fast the economy is growing, but a pattern is clear: for example, Citigroup estimates growth was 5.3% last quarter, up from 0.9% at the end of 2008.
More evidence of a rebound
But is there any point in trying to make sense of this data? Are we just tweaking numbers that are so heavily fudged for political reasons that they’re meaningless?
It’s a good question – and not just in China. To check the GDP figures, we need to check whether numbers from the rest of the economy underpin them.
And so far it seems that they do. For example, after turning sharply negative at the end of last year, electricity production growth seems to be picking up again, to judge by the year-on-year numbers below.
Meanwhile, there’s more evidence that the export slump is stabilising. China’s exports staged a pretty typical post-New Year rebound, following the improvements we’ve already seen in Korea and Taiwan.
Retail sales also seem to be ticking up, especially for big-ticket items such as cars, as you can see below. Note though that a cut in the sales tax has helped boost demand for new cars, so it remains to be seen if the bounce will be sustained over the rest of the year.
Loan growth is still exploding
But much more striking is the rise in bank lending. Since the government removed lending quotas towards the end of last year, loan growth has exploded. In March, new loans rose by over 30% year-on-year, as the next chart shows.
But where’s all this money going? A breakdown of the data suggests that a good chunk is going into providing short-term financing for business (possibly firms that are struggling as a result of the export slump). Another block of loans may simply represent “off-balance sheet” funds – covert bank lending while the lending quotas lasted – making their way back onto bank balance sheets. There have also been suggestions that some borrowers are taking advantage of low rates to funnel cash into higher-rate deposit accounts or even the stock market.
All of this is probably going on, but the bounce in GDP suggests that some of the new cash is finding its way into the real economy. Most likely, this is happening through provincial and regional government investment in infrastructure, together with business investment by state-owned enterprises. Certainly, urban fixed asset investment seems to be holding up very strongly, as you can see below. This is the key to China’s recovery, since investment accounts for around half of GDP.
But watch out – China can’t go it alone
So, is China running under full steam once more? Not quite. For starters loan growth like we’ve seen recently isn’t sustainable. If it continues, it will lead to bubbles. The authorities seem to recognise this and are guiding banks to be more cautious. But if lending remains high, it’s likely that quotas will be imposed again later this year.
This means that unless the rest of the world picks up again, China is unlikely to accelerate much further from here. We’re probably past the low point, especially given that most of the government’s RMB4trn ($585bn) investment plans won’t show up in the data until later in the year. But we’re likely to be talking 8% growth at best for the full year rather than the double-digit numbers we’ve seen until quite recently. Next year could also be slower than many expect – and there’s a risk of a double-dip slowdown if the latest boost wears off while the rest of the world remains mired in recession.
Finally, while keeping the economy ticking over is the most important thing for now, longer-term the government’s moves to encourage consumption, to share the proceeds of China’s growth more evenly between the cities and the countryside and to develop the economy are what we need to be watching. All good ideas, but implementing them will be a long process.
In the meantime, markets seem to be getting ahead of themselves. China has not suddenly fully decoupling from the world economy. Increased lending and government spending are helping to ease the pain, but China won’t be growing at its full potential again until the rest of the world recovers.
For that reason, the rally in Chinese shares and commodities such as copper looks overdone. Worse a sell-off now looks very likely once it becomes clear that this recovery is only a half-recovery.
In this week’s other news …
| Market | Close | 5-day change |
|---|---|---|
| China (CSI 300) | 2,651 | +2.1% |
| Hong Kong (Hang Seng) | 15,601 | +4.7% |
| India (Sensex) | 11,023 | +2.0% |
| Indonesia (JCI) | 1,635 | +11.5% |
| Japan (Topix) | 846 | 0% |
| Malaysia (KLCI) | 965 | +2.5% |
| Philippines (PSEi) | 2,094 | +1.0% |
| Singapore (Straits Times) | 1,897 | +3.7% |
| South Korea (KOSPI) | 1,329 | -0.5% |
| Taiwan (Taiex) | 5,755 | -0.5% |
| Thailand (SET) | 457 | +0.6% |
| Vietnam (VN Index) | 334 | +2.8% |
| MSCI Asia | 81 | +2.4% |
| MSCI Asia ex-Japan | 325 | +3.2% |
China may have stabilised but Singapore certainly hasn’t. First quarter GDP growth is estimated at a 19.7% quarter-on-quarter (seasonally adjusted) annualised rate. That’s the worst performance in the city-state’s history. The government revised its forecast for the whole year from a -2% to -5% decline to the –6% to –9% range. And, in a long-expected response, the Monetary Authority of Singapore devalued the currency, lowering the nominal effective exchange rate (the band in which the Singapore dollar trades against a trade-weighted basket of other currencies) by around 2%.
Meanwhile unofficial early results from Indonesia’s general election suggest that the Partai Demokrat, headed by President Susilo Bambang Yudhoyono, won around 20.5% of the vote, almost three times its share in 2004. The result confirms that Yudhoyono remains the frontrunner for the presidential elections in July. This will hopefully give him a stronger mandate to push through reforms during the next government term, although he will still need the support of coalition partners. Indonesia also raised $650m as a five-year sukuk (Islamic bond) offering a yield of around 700 bps (7%) over Treasuries, the first sovereign sukuk sold for over a year.
In India, heavily indebted real estate developer Unitech raised $325m in new capital through a share issue to a group of institutional shareholders in an effort to reduce its debts.
Lastly, government controlled Industrial Bank of Korea became the sixth Korean firm to issue dollar-denominated debt this year, raising $1bn in a five-year bond yielding more than 550 bps (or 5.5%) over US Treasuries.
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