China's GDP: Statistics And Reality In The Chinese Economy, Part 2

China's economic growth last year dropped to its lowest rate in a generation and though there were a number of international and domestic reasons for that performance it was not out of line, the Chinese economy has been slowing steadily for the last five years. 

The 6.6% increase in gross domestic product in 2018 was the lowest annual increase since 1990 when the economy was under international sanctions following the Tiananmen Square Massacre of the year before. Annual quarterly expansion slowed to 6.4% in the fourth quarter, the weakest three month period since the financial crisis and the 0.4% drop was the sharpest four quarter decline since 1.4% in 2011. 

In 2013 the mainland economy expanded 7.8%. It grew 7.3% in 2014, 6.9% in 2015, 6.7% in 2016, climbed back to 6.9% in 2017 and as above dropped to 6.6% last year.

Although Chinese GDP has followed a steady path lower as Beijing has attempted to move the economy to a more sustainable pace and to a consumer dependent rather than industrial model the authorities in Beijing nevertheless tout their success with GDP. China's growth rate is far ahead of any other large industrial country.  It was more than double the likely US expansion in 2018.

Gross national product is the prime economic statistic for the Chinese economy.   It is proof that the Communist Party is bringing prosperity to the Chinese people.  It is also an inordinately sensitive statistic.  The party chiefs announce the GDP goals and several months later officials report that the economy has delivered.  The motivation and opportunity for government figures in the economic reporting chain to perform as expected are manifold.

For this reason, many analysts have long suspected that the real growth rate on the mainland is lower than the official numbers.

Two recent statistics in particular are at odds with the gentle decline in China’s GDP.

The first is the official National Bureau of Statistics purchasing managers’ index for the manufacturing sector.

In December it dropped to 49.4, below the 50 division between expansion and contraction.   It has fallen sharply since registering 51.3 in August. The figures indicate ebbing domestic demand and reduced shipments to the US as the front-loading of purchases ahead of potential tariffs played out.   The index is an indicator of industrial production, trade, employment and business confidence. The last has been notably damaged by the trade dispute with the US.

The Caixin manufacturing PMI, a private survey on the same topic, slipped below the 50 division in December as well, falling to 49.7 from 50.2 in November. It also has dropped sharply from the first part of the year having been at 51.6 in February.

The second set of figures are the December readings for annual exports and imports.  Exports had been, until December, taken as an indication that the trade dispute with the US had not hurt China’s economy. In October they scored the best improvement over the year at 14.3%.

From that high exports collapsed, falling to 5.4% in November missing the consensus of 10% and then in December skidding to -4.4%, missing the 3% prediction by a wide margin.   The January reading will be released on the 30th of the month.

Imports ran a similar pattern. From 20.3% in October they fell to -7.6% in December passing through 3% in November en route. They missed the 5% December forecast and the 14.5% November prediction by large amounts.

Both categories had been supported in the second half of the year by the front-loading of orders before the possible tariff increase in December by the US. The additional tariffs did not occur because the US and China agreed to a three-month truce in their reciprocal tariffs to search for a solution to the trade conflict.

Whether these figures are as incompatible with the official GDP numbers as one brave Chinese academic said when he claimed in a YouTube posting that using official information, he calculated that 2018 GDP was actually 1.67% is debatable. Most economists dismissed his claim and the government quickly purged his presentation from the web.

What is doubted by few is that the official GDP figures give the party’s version of reality.

Posted In: NewsEurozoneForexGlobalMarketsChinaChinese EconomyFXStreettariffs
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