Can we trust the Chinese growth figures?

Data coming out of China seems to indicate that it may be close to the bottom of the business cycle. But the country's electricity consumption numbers tell a different story.

Not that anyone really believes the data out of China, but the markets did greet the news of a moderation in GDP growth, resilient industrial production and strong retail spending with some optimism. Stocks rose, bond yields jumped and commodity currencies like the Australian dollar strengthened.

Such is the growing importance of China to the global economy, that the economic news influenced markets in Europe and the US, which followed the trend in Asia yesterday until the disappointing news on Google earnings and concerns about the European Union leaders meeting scaled back some of the optimism.

With China now the second largest economy in the world, accounting for almost 15 per cent of global GDP on a purchasing power parity basis, what happens there is increasing relevant to global markets. If the Chinese economy slows too much, it is a sign of global downside risks, while any news of strong growth will boost global optimism and if strong enough usually unleashes conversations about inflation risks.

China’s GDP rose 7.4 per cent in the year to the September quarter which was the slowest rate of growth in three years, but it was no weaker than expected. That was the first bit of reassuring news. What excited the markets was the simultaneous release of better than expected retail sales, industrial production and fixed asset investment data. The fact that all three exceeded market expectations was enough, it seems, to have most now confidently predicting that the Chinese economy is at the bottom of the business cycle or very close to it. If so, this is good news.

But there are some doubts, not only about the reliability of the Chinese data, but also whether this is the bottom of the cycle.

In an attempt to overcome the scepticism concerning the reliability of the Chinese data, analysts are turning their attention to other indicators, including what should be the more reliable information on China’s electricity consumption. It is assumed these data are not subject to manipulation. The thinking in using the electricity consumption is that the stronger the rate of economic expansion, the greater the use of electricity and vice versa. The industrial sector accounts for around 70 per cent of all electricity consumption in China.

The Chinese National Energy Administration releases a monthly report on electricity consumption. The most recent observation for September showed that electricity consumption grew at an annual rate of 2.9 per cent, the slowest growth in two years. Growth was 3.6 per cent in August and was 11.7 per cent during 2011. According to estimates from Patrick Chovanec, business professor at Tsinghua University, electricity consumption actually fell 9.8 per cent in the month of September, which is considerably weaker than the normal seasonal decline.

In other words, there has been a marked slowing in consumption which fits with an ongoing slowdown in overall economic growth. Indeed, the slowing has been so abrupt that analysis from Tyler Durden of suggests that GDP growth is running below 7 per cent.

The hard numbers on the Chinese economy are also open to question when one considers the momentum in commodity prices. Swings in the Chinese business cycle are a dominant driver of commodity price changes. The broadly based Thomson Reuters/Jefferies CRB commodity price index has fallen 15 per cent in US dollar terms from the recent peak in September 2011. This suggests that global demand, including from China, is softening. In non-US dollar terms, the commodity price weakness is more severe, meaning the commodity price fall is not just a function of changes in the value of the US dollar.

All of which suggests that while the numbers for China looked superficially sound and were enough to support market sentiment, doubts remain.

Is China really going to bounce-back and sustain a 7.5 per cent to 8 per cent GDP growth pace?

Whatever the current growth, will it be stronger in 2013 or will the authorities need to deliver more policy stimulus to see growth pick up?

The People’s Bank of China have said it will no longer support a stronger yuan as it tries to boost exports. This may be good for China but it will hurt exporters to China.

There are many questions on the growth momentum in China. For now, the markets are looking at the recent data flow through rose coloured glasses and it is to be hoped they have the correct perspective and that the Chinese electricity consumption numbers are not signalling the true state of the Chinese economy.


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