China Wobbles Worth Worrying About

The Australian stock market is getting pummelled today after China announced first quarter GDP growth of 7.7%. Hardly problematic by the rest of the world’s standards, but this is something worth worrying about (or continuing to worry about, if you’ve been reading the blog for the past few years). Firstly, the official numbers are almost certainly overstating reality.

Anne Stevenson-Yang, founder of China research organisation J-Capital Research, sent an email around this morning lamenting the fact that the data out of China is ‘so weak as to be maddening’:

As the Chinese economy grows weaker, the gap between reality and statistics grows more evident. The rule seems to be if you can’t say anything nice, don't say anything at all.

More and more data sets are simply disappearing from the National Bureau of Statistics. For example, we watch statistics on cement output to get a better sense of how much housing is really being built. This data, issued monthly by region since 1992, simply disappeared for three months after December, then reappeared selectively. Cement manufacturers had been telling us their sales were down by 20-30% YoY, so it is not surprising that the data would have been repressed. The number for industrial output value added comes and goes. Profit of industrial enterprises. Several sub-categories of consumer spending seem to have been discontinued, and the categories still reported show phenomenal growth. Same with power production, where we have a mysteriously high hydropower growth number against obviously low thermal power production growth. Housing transaction data for Xi’an disappeared from October last year. Mortgage data disappeared for a whole year. And so on.

If the Chinese authorities pick and choose what they publish, you can imagine how much pressure there is to make the numbers they do publish look pretty.

Secondly, the fact that official growth is this low when there is so much stimulus being thrown at the Chinese is a sign of the impending end of the boom.

I met with four research organisations, including J-Capital, in Hong Kong the week after Easter. Even I was surprised at the extent of the bearishness on China’s medium-term growth. The views of Michael Pettis – that China’s investment led growth model is leading to a credit crisis and an inevitable dramatic slowdown in growth – have become mainstream.

Pettis still hopes that a decade of sub-par growth is the outcome. Stevenson-Yang is even more pessimistic. She thinks one potential outcome is the collapse of the Chinese political regime. Gillem Tulloch from Forensic Asia sits somewhere in between the two.

(You can watch Anne and Gillem in this US 60 Minutes piece on China’s property bubble.)

There's no need to reiterate the argument, but two years after we first started publishing our bearish views on China, it seems we are about to see the end-game. Flying out of Hong Kong Airport, my feeling was that us Australians – even the negative ones – are far too complacent. 

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