Quick Thoughts on Today’s GDP Release
- China takes the three bears approach to GDP announcements. “7.2% is just too high a no one would believe us. 6.5% is just too low and would cause concern about our economic stability. 6.9% is just right. Not too hot and not too cold.”
- Based upon all the underlying data that I have gone over, I just have absolutely no idea how 6.9% was achieved. I know I am considered a real skeptic of Chinese data but I always try to reset my ideas and approach it clear.
- Official retail sales YTD YOY were up 10.5% hitting survey estimates exactly. It is very difficult to see how this number was obtained. As I have covered previously, we simply do not see at the firm level any evidence of a retail market growing at 11%. Even if we look at output of consumer products from electronics to garments to durable household products, we simply cannot reconcile the granular data with the topline official data. I should note that even as Alibaba grows relatively rapidly, it comprises too small a percentage of the entire retail space to make up the difference.
- Electricity growth was up 1% YTD YOY which given what we know about growth in the service sector, should be taken with a healthy growth of skepticism. As the FT EM Squared group notes, financial services and specifically money center banks are responsible for almost all the growth in services. The reason this matters is that bank lending goes overwhelmingly to shrinking industries by some measures nearly 90% of lending.
- Even the industrial production numbers up 6.2% YTD YOY seem disturbingly high. Based upon what we know about both output and revenue of industrial and manufacturing firms, this number seems stretched at best and patently false in reality. These numbers among other gems include the statistic that manufacturing is growing at 7%. On top of the wealth of data covering output and revenue, I can say unhesitatingly that from my own experience in the manufacturing heartland, no one on the factory floor of the world in Guangdong would say growth is 7%.
- As the ever astute Simon Cox has pointed out, nominal GDP was actually only 6.2% meaning that the GDP deflator turned negative. This is vitally important for a couple of reasons. First, implies the producer price deflation is spreading to the broader economy. Even though officially CPI is still positive at 1.4%, there is significant downward pressure on that number and little evidence that it will be increasing any time soon. Second, this means that revenue or the nominal side of the economy is not nearly as positive as perma-pandas describing. Though the data I have shown here is much lower than 6.2% looking at revenue, this does fall broadly inline with the analysis that nominal growth is anemic. Third, this is all the more worrying for a debt reliant economy. While most people choose to use a debt to GDP ratio to compare whether an economy is facing credit stress, for numerous reasons this is a somewhat blunt instrument. However, if we look at changes in firm revenue and liabilities, we get a disturbingly different picture. Firm revenues for A-shares for instance, have essentially been flat for almost 2 years, but liabilities during that time have gone up by 15% annually and continue to rise at approximately that rate. In other words, the credit problems of firms who must pay in cash not GDP credits, is worsening much faster than the more widely used official debt to GDP ratios.
- Service growth was boosted enormously in Q2 by the enormous increase in financial services from the stock market bubble. Given the collapse in the Chinese stock market in Q3, by almost any measure such as price level, margin lending, or trading volume, it seems shall we say puzzling that service growth remained so robust.
- One of the key factors in China’s growth is their decision to simply explode the money supply. M2 growth was more than twice nominal GDP. This is further pushing credit among other issues. One of the many but under explored reasons that explain GDP growth in China is the sheer explosion of the money supply. Next to serial inflators, China is maybe the biggest money creator. Despite the narrative that China is moving away from a credit orgy of fixed asset investment towards a service driven economy, nothing is further from the truth. New loans grew 31% through Q3 in 2015 and most of that was old industry firms as I have already covered. This is not the sign of an economy restructuring, this is the signs of a desperate economy trying to maintain any semblance of growth.
Despite official continued insistence, this is not a healthy economy.