Fra Fathom/ Thomson Reuters:
We have long questioned the legitimacy of China’s official GDP statistics, with our own measure of economic activity suggesting that growth is much lower at 2.4%. While other commentators have pointed to a strategic rebalancing as the reason behind China’s economic slowing, we find little evidence to suggest that consumption is picking up the slack. We also find the reported strength of the tertiary sector in 2015 questionable, specifically the robustness of financial intermediation in the face of Q3’s stock market collapse. Struggling to rebalance and restore economic growth internally, we believe that the PBoC will allow the RMB to fall much further from here.
Regular readers will be aware that we have long questioned the legitimacy of China’s official GDP statistics. Pointing to only a mild growth deceleration, we find these impossible to reconcile with a whole host of alternative evidence, not least our own measure of China’s economic activity (our CMI) which suggests that growth could be as low as 2.4%.
Combining nominal bank lending, rail freight volumes and electricity production, some have suggested that our CMI does not adequately capture China’s much-vaunted rebalancing away from investment and export-orientated growth, toward consumption. While it is possible that our CMI does over-represent the manufacturing and construction industries, we find precious little evidence of meaningful economic rebalancing even when casting our net further afield.
The purpose of this piece is to present our findings, starting with the table below which summarises a variety of indicators, their recent movements, and whether they are indicative of a ‘good’ rebalancing or not.
While there is evidence that the old growth engine, powered by manufacturing, investment and exports, has started to stutter, we find far fewer indicators that point to a pick up in consumption. This is contrary to China’s official GDP breakdown, which suggests that activity in the tertiary sector is not only the largest as a share of nominal GDP but also the fastest growing, with annual growth outpacing that of both primary and secondary industries. As a consequence, it is now touted as China’s new growth engine. We take issue with that on several fronts.
Firstly, although the composition of growth may appear to be moving in the desired direction, that movement has been amplified by slowing secondary sector growth — rather than a meaningful pick up in private consumption. Indeed, on a 12-month smoothed basis, retail sales growth has decelerated sharply.
Other measures of consumer demand also point to a diminishing appetite. For example, official data reveal that there has been a marked contraction in Chinese import demand, with consumer goods imports falling 12.4% in the year to November on a 12-month summed basis.
In addition, Chinese tourists appear to be spending more cautiously, with expenditure per person visiting the US falling consistently since 2011. Tellingly, this occurred over a period when the renminbi was strengthening against the US dollar.
Secondly, we find the reported strength of the tertiary sector in 2015 questionable. As our chart illustrates, with the exception of financial intermediation, all other service sector subcomponents have performed insipidly since the global financial crisis. This is echoed in both the official and Caixin PMI surveys, which reveal that although activity in the non-manufacturing sector is expanding, it did so at its slowest pace on record in 2015.
Moreover, we find the strength of the financial services subcomponent difficult to understand. Indeed, with its growth so closely related to China’s equity market performance, it is surprising that the third quarter stock market collapse did not exert more of a drag.
In addition, since last July, a ban on equity sales by large shareholders has stifled transaction volumes. Nevertheless, according to China’s National Bureau of Statistics, the sector’s annual growth merely dipped 0.5 percentage points to 17% between the second and third quarters in 2015.
Recent movements aside, we also find the sheer size of China’s financial sector somewhat questionable. Based on official statistics, it is almost the same size as the US when measured as a proportion of total nominal GDP. Meanwhile, other gauges of financial integration, such as the proportion of ATMs and commercial bank branches, are far lower in China than the US.
Within the tertiary sector, the ‘other’ category officially accounts for almost 40% of the sector’s output, and 20% of total GDP. Nevertheless, the category is shrouded in mystery, with no up-to-date detailed breakdown publically available.
