Four Reasons Why: Official Chinese GDP Data Don’t Reflect the Country’s Slowdown
Chinese authorities insist that the country is on track to generate 2012 GDP growth of 7.6%. But here are four reasons why those official figures may mask a more uncomfortable picture of the country’s real economic growth rate.
Skepticism about the reliability of official economic data reported by the Chinese government has been a given, especially when it came to the magnitude of the country’s growth. Until recently, the question was whether China’s leaders might be downplaying the magnitude of GDP growth. Now, investors and economists wonder whether the Chinese economy can really be as robust, in relative terms, as the GDP data makes it appear. In the first half of 2012, its GDP grew 7.8%, but even those official figures are significantly below year-earlier levels, when GDP rose 9.6%, and marks the slowest rate of increase since the first quarter of 2009. Still, Chinese authorities are adamant that the country will sustain that rate of growth, insisting it is on track to post a 7.5% gain in GDP for 2012.
With sluggish growth in the developed West, economists and investors have pinned their hopes on China’s ability to continue driving global demand. That may be overly optimistic, however; and if Chinese growth also falters, we may face a heightened risk of global recession.
Going beyond the top-level macroeconomic data, here is an alternative economic dashboard of sorts to help you think about what lies ahead for China – and why official GDP numbers don’t tell the full story of the country’s economic weakness.
PMI vs GDP: the Showdown
The PMI data from China sends signals that all isn’t well.
The HSBC Flash China PMI fell to 47.8 in August, its lowest level since last November and significantly below the July level of 49.3. While the PMI has been in negative territory – any reading below 50 signals a contraction – for the last ten months, the August survey also showed signs that inventories are indeed climbing and that export orders are falling. It’s hard to envision a contracting PMI translating into GDP growth of 7% or more – even in China, a country that appears to delight in flying in the face of conventional wisdom.
Electricity Production Flatlining
The growth rate in electricity production, after spiking early this year, has fallen back sharply to near zero – and there it lingers. If the Chinese economy were truly growing at a rapid clip relative to the rest of the global economy, it would be reasonable to see a stronger rate of growth in electricity production and consumption. Sales of caustic soda – another barometer of industrial production – also are registering zero growth.
Profit Outlook for Mining Companies Falling
Mining stocks have faltered of late; for much of the last decade or more, their single largest source of demand is China, which has become the marginal player in metals markets. Since share prices are forward looking, the odds are that investors are viewing the future prospects for demand for China with alarm. Luxury goods stocks also have hit some speed bumps of late – and in this section of the retailing universe, Chinese consumers also wield a great deal of clout. Another warning sign? The prices or rare earths like neodymium and cerium also have slumped this year. The common element: in all these markets, China wields disproportionate influence. When China sneezes, they are the first to succumb to the flu. Chinese stocks themselves are sending similar signals: since the start of 2010 the Shanghai Composite index has fallen nearly 37% while the S&P 500 is up 26% over the same period.
Macau Gaming Revenues Sharply Lower
Las Vegas may still be synonymous with gambling in much of the world, but casinos in Macau, the former Portuguese colony now returned to China, now rake in more money than does Vegas, thanks to the mania for gaming in a country where conservative investing has rarely paid off. On one weekend last year, some 170,000 mainland Chinese residents hopped aboard a ferry or a bus bound for Macau, hoping to transform their savings into a big win. The popularity of Macau’s myriad casinos with Chinese from all walks of life makes gaming revenues a proxy for Chinese GDP growth – and they are plunging, as the chart shows.
To be sure, the China bulls have plenty of ammunition to hand, too. They point to the fact that China is running a budget surplus and serves as a safe haven for those looking for shelter from the debt woes that afflict the developed economies. But the data above should at least offer give the bulls a reason to stop and ponder their convictions. Are the official data being artificially inflated by factors like stockpiling by businesses and local governments as the latter attempt to hit central government growth targets? If so, those purchases of materials would be reflected in GDP, but without them triggering any real economic activity. Or perhaps Chinese GDP simply a lagging indicator of the economic slowdown now brewing in China? Regardless of why this gap between “on the ground data” and the official GDP numbers appears to exist, it does signal that it’s time for caution.