Fra Fathom Consulting:
The latest reading from our China Momentum Indicator suggests that growth remained close to 3.0% on an annualised basis in August. With a hard landing for China now in train, China’s investment as a share of its GDP may already have peaked. If it has, then based on our analysis of other economies that have suffered unsustainable investment booms, consumption will not take up the slack as investment falls. Growth could be close to zero for a number of years.
The depths of China’s economic downturn have become almost palpable, and the nation’s official statistics are now widely dismissed by investors. We have long argued that China’s economy was at serious risk of a hard landing. Accordingly, evidence of the country’s dramatic slowdown has come as no surprise to us.
Indeed, our own measure of China’s economic activity (our CMI) began to deviate from China’s official GDP statistics in 2013. That wedge has now widened considerably, with August’s CMI reading suggesting that growth remained close to 3.0% on an annualised basis.
Combining nominal bank lending, rail freight volumes and electricity production, our CMI is sometimes accused of under-reflecting China’s much-vaunted rebalancing away from investment and export-orientated growth, toward consumption.
While it is possible that the manufacturing and construction industries are over-represented, and China’s budding ecommerce sector under-reflected, we chose these three indicators because they were identified by Premier Li Keqiang as providing a better gauge of economic activity than the official estimates of GDP. And in principle, the lending data should provide a good representation of services sector activity.
Other indicators of economic activity are indicative of a broad slowdown, and provide little evidence of rebalancing. As we explored in our newsletter ‘No respite for China as our CMI falls to 3.0%’, multiple alternative measures of Chinese consumer demand have deteriorated of late. Indeed, according to China’s official statistics, consumer goods imports were down 4.0% in the twelve months to August. Merchandise exports to China from the US, euro area and Japan paint an even bleaker picture, down 13.2% in the twelve months to July.
Officially, investment still accounts for the bulk of Chinese GDP at just below 50%. However, there is a strong possibility that the investment-to-GDP ratio is at or close to a peak. Analysis of other Asian economies and their GDP profile post-investment slump casts doubt on the hope among China bulls that consumer expenditure will take up the slack.
As our chart demonstrates, after investment fell from its peak as a share of GDP, it took an average of three years to restore real output to its prior level. Within this, nearly half of the countries analysed experienced no growth at all for the first five years. We believe that there is very little reason to assume that China will be any more adept at transitioning to a consumer-led economy than those featured in our analysis. This is one of the issues we consider in our upcoming quarterly Global Economic and Markets Outlook for 2015 Q4.
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