Tag Archives: GDP

OECD Edges Up China Growth Forecasts

THE OECD HAS raised its forecast for China’s GDP growth this year by one-tenth of a percentage point from the 6.4% forecast it made last November. It has also raised its 2018 projection by one-fifth of a percentage point, to 6.3%. The 2017 forecast puts it squarely in line with the new official target of ‘about 6.5%’.

Its nutshell summary is:

Growth in China is expected to edge down further by 2018 as the economy manages a number of necessary transitions, including shifting towards consumption and services, adjustment in several heavy industries, working off excess housing supply and ensuring credit developments are sustainable. Demand is being supported by very expansionary fiscal policy, including via policy banks, which in turn is boosting private investment and trade. Producer price inflation has picked up strongly, but consumer price inflation remains low.

The OECD also notes that the rapid growth of private-sector credit and the relatively high level of indebtedness by historic norms is a key risk. Non-financial companies’ high debt levels provide particular vulnerability to a rapid rise in interest rates or unfavourable demand developments, it says. The report also advocates spending be directed at health and education and directed away from adding to financial risks.

The significant uncertainty about the future direction of trade policy globally is a key theme in the report, which makes the self-evident point that a roll-back of existing trade openness would be costly. Around one in seven jobs in China is linked to participation in global value chains.

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Li Lays Out China’s Economic Goals For The Year

CHINA HAS SET its growth target for this year at ‘around 6.5%’, prime minister Li Keqiang told the annual session of parliament. That is down from 2016’s goal of 6.5%-7% and the outcome of 6.7%.

The glide path to slower but more sustainable growth continues. However, it will be a more cautious approach this year ahead of an important party plenum later this year at which the scope of President Xi Jinping’s second term and eventually succession will be set.

China also faces a more uncertain external environment economy than any time since the 2008 global financial crisis, while the stimulus that staved off deflation last year has left the debt crisis still to be dealt with. While China is perfectly able to deal with that on a macro level, signs of local stress are increasingly apparent.  The finance ministry has again just warned of the ‘the hidden-debt risks of local governments’, especially in the rust belt in the Northeast.

Li’s signalled that the leadership considered 6.5% growth a floor, though if there is any suggestion of social or political instability (and especially instability within the political elites), that floor will, no doubt, be lowered.

Last year, 726,000 workers were shifted out of rust-belt industries; this year another 500,000 will follow, according to the labour minister. China created more than 13 million new jobs last year, according to the official figures, but a further half a million redundant iron and steel workers and coal miners is a lot to absorb, and especially in places where few new industries are flourishing.

Removing excess capacity from heavy industry has proved more difficult than planned as has killing off ‘zombie’ state-owned enterprises.

Rebalancing the economy has also progressed more slowly than Xi laid out when he assumed the leadership four years ago; one reason is that he has repeatedly turned to old-school stimulus whenever the economy looked to be slowing too rapidly.

The government will have work to do to reduce last year’s fiscal deficit of 3.8% of GDP to the wished-for 3.0% (which was also last year’s target).

Li set another ‘about’ target, of ‘about 12%’ for broadest measure of money supply (M2). While that is less than 2016’s target 13%, it is still above end-2016  money supply growth of 11.3%. More monetary policy tightening is likely, barring severe adverse external headwinds.

The military budget will again be restricted to a 7% increase (1.3% of GDP), even though US President Donald Trump has promised a 10% hike in the United States’ defence budget. The United States spends 3.3% of its GDP on defence.

Beijing’s holding fast after decades of double-digit growth will increase the already sizeable spending gap, $600-plus billion a year against $140 billion a year, though off-budget procurement could add a further $50 billion to China’s number and the modernisation of the PLA will continue.

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Data doubts

Abacaus. By HB (Own work) Public domain, via Wikimedia Commons

THIS BYSTANDER HAS long not given undue credence to the case that China’s economic data misrepresent the real state of the economy — or at least they don’t misrepresent it any more than any other country’s data.

That assertion comes with a bunch of caveats, notably that counting the output of any economy is fiendishly difficult, and especially one as large as China’s. Also, as nations evolve from being manufacturing- to services-based, the task gets even more challenging.

The way the world counts GDP was designed for an industrial era where there were hard outputs to measure:  ingots of steel;  sacks of coal; trucks full of widgets. In a services-dominated economy, GDP, which is, after all, no more than the value of the output of goods and services, can be increased merely by having bankers raise their fees.

China has a track record of announcing GDP data closely aligned with official targets. It is reminiscent of the way the General Electric Corporation in the United States in days past used to report quarterly earnings bang in line with the guidance it had given stock analysts.

Smoothing earnings, that was called. State planners would appreciate the technique if anyone would.

China’s national GDP number is derived from data collected across the country and while the National Bureau of Statistics fields a team of more than 20,000 data collectors, they still need local assistance.  The importance, real and symbolic, that Beijing attaches to the overall GDP figure is an incentive for local officials and state-owned enterprises to bolster the numbers they furnish.

President Xi Jinping has set a national target of doubling output and income levels by 2020, goals that demand annual GDP growth to average 6.5%. Patriotic statistical duty becomes self-evident.

Longstanding readers may recall Prime Minister Li Keqiang once saying that the country’s GDP data was “man-made” and that measures such as electricity consumption and freight volumes carried by rail were better indications of economic growth.

However, it is almost a decade now since he said that — and analysts named a now barely remembered index of such proxies after him.

China’s national statistics have become much more robust over the ensuing period, particularly those for industrial output which a decade or more back had known methodological flaws in their collection. Paradoxically, those have been mostly fixed just in time for industrial data to become relatively less important than that for services in the overall GDP number.

Similarly, measures like electricity consumption have become less reliable indicators of growth as the economy has become a more efficient consumer of power. Furthermore, is that electricity being used to run a mill or a mall?

Wang Baoan, the disgraced head of the National Bureau of Statistics who has been brought down by the anti-corruption campaign, had once said that tax data supported his office’s GDP numbers — not that that is an assertion that can be easily verified by outsiders.

In short, China’s numbers may have a wide margin of error, and state statisticians have become adept in optimising the GDP deflator used to convert between nominal and real growth (underestimating the inflation measure will give an impression of faster real growth), but fudge is not the same as fabrication.

For one, policymakers themselves need a more not less accurate GDP number to direct the economy along its decelerating glide path towards ‘rebalance’. Even China would be unlikely to be able to conceal the existence two sets of books indefinitely.

China now publishes so much economic data that evidence of activity, in piecemeal parts of the economy at least, is hiding in plain sight. Perhaps the one thing that can be said with certainty is that both the official statistics and the numbers proffered by their critics are now mostly headed in the same direction.

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August 27, 2016 · 4:06 pm

Stimulus Spending Steadies China’s GDP Slowdown

THE SECOND-QUARTER GDP growth figure came in at 6.7%, the same as for the first quarter. So growth for the first half was surprisingly steady and, surprise, surprise, bang in the middle of the government’s target range for the year of 6.5%-7.0%. Policy support through state-sector infrastructure spending has done the trick.

More of it will probably be needed in the second half. The economy expanded at 6.9% last year, so the slowdown is real if gradual.

However, it cannot slow below 6.5% if the 2021 centenary of the founding of the Communist Party is to be celebrated by hitting the goal of doubling GDP from its 2010 level and thus creating a ‘moderately prosperous society’.

That, in turn, will require more progress on ‘rebalancing’ the economy than has been made to date. At the same time, the infrastructure spending being used to juice growth risks a build-up of more debt with the accompanying concerns that more of it will go bad.

As IMF deputy managing director Mitsushiro Furusawa noted at a symposium on July 11:

A rising share of debt is held by Chinese companies that do not earn enough to cover their interest payments. The most recent IMF Global Financial Stability Report estimated that “debt-at-risk” had increased to 14 percent of listed Chinese companies’ debt, up from 4 percent in 2010.

Still within the bounds of manageability, but moving closer to them rather than away.

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Third-Quarter GDP Figures Underline China’s Hard Slog In Rebalancing

Dalian Market, Dashang Group's flagship store in Qingniwaqiao, Dalian, Liaoning, China, 2009

Third-quarter GDP growth came in at 6.9%, its slowest quarterly growth since the immediate aftermath of the 2008 global financial crisis.

The outcome was one tenth of a percentage point faster than forecast by private economists and in line with the government’s official target of “about 7%,” which Prime Minister Li Keqiang has fudged even more by saying slower growth is acceptable provided sufficient new jobs were being created — the subtext being that growth won’t be allowed to slow to the point where social stability is at risk.

To that end a series of old-school pump-priming measures have been taken — interest rate cuts (five in the past year), lowered bank reserve ratios (on three occasions), aid for exporters and speeded-up approvals for large infrastructure investment. However, as we have noted many times, these hold back the switch away from the economy being led by (debt-financed) infrastructure investment and exports to being led by domestic consumption.

Nonetheless that ‘rebalancing’ is happening, albeit more slowly than the leadership would like, and China needs for reasons that we shall return to below.

For all the attention paid around the world to the economic indicators of industrial output and merchandise trade, the tertiary sector of the economy — i.e. services — is growing faster than the secondary — i.e. manufacturing, mining and construction. In the third quarter, services expanded by 8.4% compared to secondary industry’s 6%.

In 2006, according to World Bank figures, industry accounted for 47.4% of the economy, services 41.9% and agriculture 10.7%. By 2012, services had nosed ahead of industry, 45.5% to 45.0% with agriculture at 9.5%. For last year, the numbers are estimated to have been 48.2% and 42.6. Meanwhile, exports have failed from the equivalent of 35.7% of GDP to 24.2%.

By comparison, services accounted for 78.1% of GDP in the U.S. in 2012 and industry for 20.6%. In Germany, the numbers were 68.7% and 30.5%, respectively, which gives a sense of how far China still has to go in rebalancing.

That all said, stronger fiscal spending and more measures to promote rapid credit growth is likely in coming months to keep the pump primed and the growth slowdown on a measured glide path. At the same time, the leadership needs to keep pushing through the deeper structural reforms that rebalancing demands and which China is running out of time to put in place if the country is to vault from the ranks of poor countries to rich.

The incongruity is that in the process of making its economy more market-oriented — albeit market-oriented with Chinese characteristics — it is building up its state-owned enterprises (SOE) to be more innovative and business-like in a way that distorts markets and entrenches vested interests that, in turn, increase the resistance to reform. It also crowds out the entrepreneurs and small and medium sized companies where growth-generating innovation flourishes.

Those need a business environment that is framed by good institutions and a regulatory and governance regime that may not be to the taste of big business in the form of the SOEs, who see their (patriotic) role as competing with other multinationals not fending off pesky upstarts at home. The third-quarter figures underline how much of a hard slog putting that in place that is proving to be.

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China Plans To Recalculate Its GDP Number Upwards

Most developed countries have done it, and now so will China — boost GDP growth through an accounting change. The National Statistics Bureau says wants to use market values for assets such as land and property values when calculating gross domestic product. It also says it wants to bring its calculations more in line with international practice. That most likely means that research and development and other intangible assets will no longer be regarded as a mere expense, but will be transmogrified into an investment.

The instant effect will be a one-off jump in the GDP number. It is hard to know by how much without knowing more of the accounting detail but it is likely to be material. R&D spending in China reached 1 trillion yuan ($64 billion) in 2012, equivalent to 2% of its gross domestic product, according to state media.

It is, though, a change to be welcomed, and one a U.N. working group to set an international standard for GDP accounting agreed in 2008. The U.S., Canada, Australia and U.S have already made or are making the change on intangible assets. Europe will, too, next year.

GDP is a creature of the manufacturing economy, a measure of an economy’s hard output of goods and services. It is less good at capturing the intangible economy that is coming to represent more and more of the value created though innovation and creativity in the economies of the 21st century. Intangibles include not just R&D but also patents, copyrights, trademarks, designs, cultural creations, and business processes.

When the U.S. made the change in the middle of this year, which in its case also included counting creative works such as films and books as long-lived assets, it provided a one-off jump in GDP of 2.7% (in raw data terms, the equivalent to adding an economy the size of Belgium). When new definitions are introduced, past estimates of GDP get re-stated so percentage changes in GDP are only slightly affected. But they do capture something of the changing nature of an economy. Restating the U.S.’s historical GDP numbers using the new definitions raised annual economic growth between 1959 and 2007 to 3.39% from 3.32%. In more recent periods the difference has been higher, an 0.17 percentage points difference in 1995-2001 and an 0.12 percentage points difference from 2002 to 2007.

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Structural Slowdown in China’s Economy Already Six Years In

Much is said about if and when China will shift, as would be expected after three decades of 10%-plus annual GDP growth, to a new phase of slower economic expansion. The International Monetary Fund suggests it may already have happened.

In its latest annual Regional Economic Outlook for Asia and the Pacific, it says that China’s trend growth peaked in 2006-07 at 11% and has been on the decline since. In other words what has happened to growth rates since is not the consequence of a cyclical slowdown caused by the global financial crisis but the start of a structural change to the economy. The IMF’s economists note that the same happened to India’s economy just shortly afterwards. Its trend growth peaked at 8%.

For both countries, the IMF says, the slowdown seems to have been driven largely by a decline in trend total factor productivity growth — broadly that they are getting less productivity gain from technological and process change — though to this Bystander that could be symptom as much as cause. The IMF says China’s medium-term trend growth is now 8%, the same, as it happens, as its forecast for GDP growth this year.

The Fund’s economists acknowledge that their methodology is intrinsically backward looking. That though lets them dodge the hard question, how much farther down the declining arc of trend growth is there to go?


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Wen’s Words Buck Up China’s Slowing Economy

Avuncular Uncle Wen is always the man to send to uplift spirits and spread reassurance when natural disaster strikes or times are trying. This week, China’s prime minister has been dispatched to his home turf, the economy, which has just reported its seventh consecutive quarter of slowing year-on-year GDP growth at 7.4% in the third quarter. And he is at his most upbeat. He says the slowdown has stabilized, and the official target of 7.5% annual growth for the full year will be achieved.

When it was first announced in March that target seemed a ridiculous low-ball of a number, one that would be easily exceeded so that the outgoing leadership could hand over to their successors on a high note, at least as far as the economy went, and particularly in comparison with the ailing developed economies. But the managed slowdown in domestic investment, aka deflating the property bubble and stopping the local government debt bomb from exploding, has been exacerbated by the drop in demand from China’s export markets, and especially from its largest, crisis-wracked Europe. Policymakers have had to walk a fine line between stimulating the economy sufficiently to prevent growth slipping irrecoverably below the official target and reigniting the inflation they struggled so long to bring down. At the same time, they had to avoid inadvertently lighting any fuses close to the banks’ loan books.

Yet Wen is all public cheer: “Exports have gradually recovered, consumption has grown steadily, price inflation has clearly receded, the job market has been very good,” he said in a statement published just ahead of the announcement of the third-quarter GDP number. There are monthly numbers to back him up. Exports rose 9.9% year-on-year in September, while inflation dipped to 1.9%, well down from last year’s peak of 6.5%. Retail sales were up 14.2%. This Bystander is always wary that one month’s number is no guarantee of the performance of the next one, though we don’t doubt that the 7.5% growth target for the year will be met, by hook or by crook. But Wen looks likely to over-deliver by as little as it is now clear he under-promised.

Wen also pointed out in his statement that the government “had taken new steps towards structural transformation.” As to whether he has pushed the economy fast enough down the road to rebalancing and far enough so his successors won’t turn back, we’ll leave for another day.

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China’s Slow Growth Finds Its Trough

How much stock should we put in the talking up of the economy by leading Chinese officials? Given that they have little control over the biggest short-term driver of the economy, external demand, that they are running out of time for monetary policy, such as it is, to work before the imminent leadership transition, and that reverting to the old standby of infrastructure spending risks undoing both the hard-won cooling of the property market and the long-term rebalancing of the economy, the answer is probably not much.

Corporate profit reports probably tell a truer story. It is not a comforting tale. Take these two bellwethers:

  • Cosco, operator of the world’s largest bulk cargo fleet, this week posted a loss for the six consecutive quarter and said the outlook for its industry remained bleak as a result of a gut in shipping capacity; i.e. more carrying space of inbound cargoes of raw materials and outbound ones of exports than there is demand for; and
  • Baoshan Iron and Steel, the country’s largest listed steelmaker, expects the third quarter to be “the most difficult” of the year, even though it expects to stay in the black just about.

The economy might be getting close to the end of its slowdown in growth, but it looks as if it is going to be bumping along the bottom for some months yet, regardless of the political imperatives to hand over an economy delivering the sorts of growth rates that justify the Party’s legitimacy to rule. But stimulate now with infrastructure spending and that  risks setting back the long-term changes to the economy that the Party will need to pull off if that legitimacy to rule is to outlive the next generation of leaders.

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China’s Dilemma In Responding To Slow Q2 GDP Growth

We were expecting a weak second quarter GDP figure, and China hasn’t disappointed. Its economy grew by 7.6% between April and June, down from the first quarter’s 8.1%. That was sixth consecutive quarter of slowing growth, and the slowest quarter since the immediate aftermath of the 2008 global financial crisis. Though the number was in line with analysts’ expectations–and the expectations the government is trying to set for its citizens long used to double-digit growth–the nagging question is whether there is a bottom in sight, and thus the extent of the further stimulus policymakers need to provide in response.

The conflux of cyclical and structural slowdown makes this more difficult to get right. The usual remedy of infrastructure spending via state-owned enterprises delays the necessary rebalancing of the economy that will provide the long-term growth of the future. Beijing won’t want to reverse its measured deflation of the property bubble or risk a sovereign debt crisis blowing up as it tries to defuse the local government debt bomb. A mess of either sort is not the economic legacy the outgoing leadership will want to hand on to its successor.

Like governments in developed countries, Beijing has to face the fact that it is neither the price nor volume of money available that is the problem now but the lack of demand. In China’s case changing that means structural reforms, both to put private capital to work and to free up consumer savings for both that and consumption. If there is a silver lining to the current dark economic clouds, it is that financial reform in China tends to be easier to push through when the economy is going through rough spots than it is when the economy is charging ahead gloriously.

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