Is the Chinese Service Sector Growing Enough to Drive 7%?

Balding's World

Perma-pandas have pretty much abandoned making the argument that the product economy is growing any where near 7%.  Even in a relatively data hungry economy like China, there is simply way too much data indicating that product output is essentially flat.  From consumer to manufacturing or commodities, domestic product output is essentially flat in China and imports are collapsing.  This is based upon a variety of granular level indicators that I have covered here and elsewhere.

Never discouraged in their quest for the mythical 7%, perma-pandas now argue that service sector growth is driving total GDP growth in China.  There are numerous problems with this argument from the factual to the theoretical.  First, the perma-panda argument is relying exclusively on top line official data that the service sector.  Top line official data is very questionable and especially the supposed shift in GDP structure in recent history.  As noted recently here, a wide variety of service sector industries were averaging revenue growth in the low to mid-single digits that began at the latest in 2014, despite official data showing a shift to the service economy.   Oddly, even the perma-panda data fails to indicate an increased share of services in the GDP basket despite their argument for its importance.

Second, if we exclude top line official National Bureau of Statistics data, there is simply no evidence of rapid service or consumption growth in the Chinese economy.  I want to be clear on this point that service growth does not appear as weak as product output, however, most evidence indicates it is only growing in the low to mid-single digits.  I have already addressed certain areas like transportation and telecoms which using year over year year to date growth, are experiencing weak growth.  Telecom services appear to be suffering small declines with provider revenue mirroring this change.  Transportation and freight appear to be essentially flat, though due to methodological changes in data counting, which have never been explained publicly, passenger numbers between 2013 and 2014 dropped significantly.  Consequently, while we cannot extrapolate further than one year, the year over year and year to date passenger numbers are flat and are comparable.

Most recently, I have downloaded data on data related to medical and health services.  If the supposed boom in services is happening, it certainly isn’t happening in Chinese health care.  Visits to medical institutions, hospital visits, and primary medical facilities are growing at 2.98%, 5.40%, and 1.56% respectively.  If Chinese consumers are going to consumer a higher level of health services or consume health products, it is an absolute pre-requisite that their visits to health institutions increase.  Furthermore, while I did not test for this econometrically, given the continued aging of the Chinese population, a small increase in visits to health care providers is expected.

Medicine output, both western and Chinese tells a similar story, with a caveat.  Traditional Chinese medicine year to date total monthly output is down 15.1%, though this decline is due largely to slowing production in July and August.  Through June traditional Chinese medicine output was essentially flat registering a miniscule 0.59% increase.  While the year to date number for raw chemical medicine output at the end of August was a distinctly more robust 17.5%, this number comes with a significant caveat.  For some reason, this number goes through large intra-year swings.  If I reported the number as of June, it would come in at a much more moderate 3.8%.  Looking back over the past few years of this category, it is prone to large intra year swings that will move between significant YTD increases and then back to small declines.  It is likely that the 17.5% growth will not continue for the rest of the year.

If health services consumption is going to rise we should see higher levels of hospitals, medical institutions, and primary medical facilities.  It defies logic that health care service utilization would rise but visits and basic medicine use would grow slowly or fall.  Correlated with that, we would expect to see increased primary and Chinese medicine consumption.  While neither visit or basic medicine growth is negative, neither are they robust even in the mid to high single digit range, with the noted caveat about the August spike in raw chemical medicine.  Low to mid single digit growth in specific health services that would be a comprehensive indicator and consumption that would be strongly correlated with higher health service usage, simple do not indicate the growth necessary to rebalance the economy.

Third, perma-pandas are confronting the laws of mathematics in attempting to defend the increasingly elusive 7%.  Let’s take a slightly stylized version of the Chinese economy.  Assume they have a 50/50 split between production and services,  which isn’t exact but close enough for our purposes.  Now let’s assume that production is growing at 2%.  It is hard to find any output growing that fast, much less all output, but let’s assume that for the moment.  For the remaining 50% of the economy to push total GDP growth to 7%, that would require the service sector in aggregate to grow at, in our somewhat simplified version of the Chinese economy, a total of 12%.  So far, if we exclude top line NBSC data, I haven’t been able to find any service sector growing at double digits much less the entire service sector using key metrics.  I am not the brightest guy around but I struggle to see how health service provision and consumption can increase in double digits when visits and medicines are growing so much slower.  I fail to see how telecom services can positively contribute to service sector growth when virtually all its components are negative.  Service and consumption need to grow significantly faster than 7% to push the entire economy up to 7% given the acknowledged slowdown in output and it simply is not merely a flesh wound.

I want to note on specific caveat about the data I am producing as I go through various sectors of the Chinese economy focusing on consumption and services.  The metrics I am using, such as hospital room and primary health care institution visits, are imperfect metrics in the sense that are not perfect substitutes for their respective components of GDP in health care service provision.  However, they absolutely should be closely correlated with the respective components of GDP.  Telecom service provider revenue is again an imperfect measure of telecom services GDP, but when the official statistics claim 23% growth and service providers are declaring flat revenue, this raises serious questions.

I will continue to search for data in various service industries however, having covered transportation, hotel and catering, telecommunications, and now health care services, the granular industry level data simply does not support the story of rapid service sector growth in China. Despite repeating it over and over, there is simply no underlying evidence that service sector growth is rapid enough to make up the difference in flat production output to turn China into a 7% GDP growth country.

Note: Data from the post cited can bedownloaded here.