Is China slowing or stalling?

Akash Prakash has a useful article on China in ‘Business Standard’ today. It is interesting to hear from Akash of the metrics for China Services that Bernstein Research has developed. Important to understand the weights for each of this item in the GDP calculations. NBS attached a big weight to financial services and yet reported that it grew 16% in Q3 despite the stock market bubble crash. In the past, it has routinely assigned greater weight to sectors depending on whether it wishes to show higher or lower growth, depending on which one would go down well with the market. Further, 6.9% is suspiciously too close to 7.0% to be credible.

China’s data is the only instance, perhaps, among the so-called big nations, where the actual data and the consensus forecasts hug each other so tightly. ‘China’s growth – miracle or mirage?’ by 720Global has a great chart on the Consensus forecasts vs. Actual  Growth in the USA and in China:

Forecasting and calculating GDP is extremely complex due to the massive amounts of data required to quantify economic activity. Forecasting U.S. GDP has proven extremely difficult for economists, even though an immense amount of reliable and timely data exists. China reports much less data than the U.S. and the reliability of the data is certainly questionable. This lack of dependable inputs makes forecasting China’s economic growth inherently much harder. In spite of such hurdles, those forecasting China’s GDP have developed an uncanny ability to hit the nail on the head. The chart below shows the accuracy of consensus Chinese and American GDP forecasts versus actual GDP. Note that in the last 6 quarters, the consensus forecast for China’s growth was perfect half the time. The other half was off by a mere tenth of one percent per quarter. Conversely, forecasts of U.S. growth have missed by a wide margin more often than not. [Link]

‘Capital Economics’ – not a bear on China – has many useful charts that explain the discrepancy between reality and reported growth rates. Check out their Twitter handle, ‘@CapEconChina’ and look for posts published between Oct. 19-22. Of course, the irrepressible Christopher Balding has had his own comments to make on the 3Q GDP growth and related matters.

In the important policy gathering of the Party next week, the Party is expected to reaffirm growth over reforms. ‘Capital Economics’ writes:

We shouldn’t expect China to have a statistical system as robust as those in the developed world. But, the problems in China go beyond those normally found in an emerging economy. The biggest is that the GDP growth rate is politically sensitive, which makes it more likely to suffer manipulation. Unfortunately, early signs are that the forthcoming Five-Year Plan will include a GDP growth target. If so, the value of the GDP data as a measure of the economy’s strength will continue to be undermined. [Link – only a blurb available. the quote is verbatim reproduction of the blurb]

China Minsheng Banking Corp., the country’s biggest private lender by assets, warned on Thursday (15.10) of growing systemic risks in its home market and said it was reorganising its loan operations after suffering a sharp rise in bad debts.

As for the health of the corporate sector, there was an article in Bloomberg (1st October) that graphically captured the deep malaise in the corporate sector. It was based on Macquarie Research. In 2007, out of the total non-financial corporate debt of around CNY6.0trn, about CNY400bn had an interest cover ratio of less than 1. By 2013, the total debt stock had leapt to CNY20.0trn and the amount of debt with the coverage ratio of less than 1 had climbed too, to CNY4.0trn. By 2014, the debt had continued to climb to CNY22.0trn and now the debt that did not have even one time interest cover had jumped to CNY6.0trn. Debt is a big deadweight that is going to weigh down on China as it has, in the case of Japan.

But, one crucial difference. Japan’s deflation started much late. China, even with its dodgy macro data, reported that GDP deflator change y/y was -0.7% in Q3.

Yet, in the third quarter, debt was ramped up. When in doubt, it is about growth and credit and not reform, restructuring or rebalancing. TSF – Total Social Financing – went up by 31% and between July and September, total new loans had gone up by 30% y/y. That does not smell of rebalancing to me.

Having decided to abandon restructuring and reform in the real estate sector by opening up the loan tap and lowering restrictions on second and third loans, enhancing loan-to-value ratios, the government is now again developing cold feet. Shanghai Real Estate market has gathered steam too quickly and now, the local government wants to slow down or suspend land auctions. It wants to attach new conditions such as building more apartments than originally envisaged, so as to increase supply. This is ‘stop-and-go’ policy reeking of ad-hocism and not reform or rebalancing in a sustained manner.

What Akash says in the end is apt. India cannot afford to rest on its laurels, if any. It has very few, in fact. India is always a hair’s breath away from stagflation and overheating. Its production structure is inefficient and incapable of attaining scale efficiencies. In the case of China, it is undeniable that their economic transformation, despite all debt troubles, has been remarkable and impressive.

If nothing else, the Chinese government beats India hands down in its determination and passion to see their country scale greater heights. India talks the talk but does not walk the talk. Even when the leadership appears sincere and committed to doing so, there are enough in the country to ensure that it does not happen. That is what is on display in the country today.

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