Headline growth number masks dismal real picture

At least one set of analysts believe mainland real GDP growth was actually minimal to negative in the second quarter of this year

PUBLISHED : Tuesday, 16 July, 2013, 12:00am
UPDATED : Tuesday, 16 July, 2013, 5:40am

On the face of things, the second quarter economic numbers released yesterday by Beijing do not look too bad.

Yes, 7.5 per cent year-on-year growth is low by mainland standards. But it is in line with the government's target rate. And compared with the United States, where first quarter growth was just 1.6 per cent, or the euro zone, where economies are shrinking, it looks spectacular.

However, dig beyond the headline number, and the picture that emerges is rather less encouraging.

For one thing, there are persistent worries about the sustainability of China's growth mix. The country's new leaders have proclaimed their intention of rebalancing the economy away from its overdependence on investment and towards a greater reliance on consumer demand.

It's a laudable aim. Unfortunately, as exports and investment growth has slowed, the knock-on effects mean that household consumption growth has slowed even faster.

According to the official figures released yesterday, consumption - both by households and the government - accounted for a smaller share of China's growth mix than at any time since 2010.

In contrast, gross capital formation drove more than half China's growth for the quarter, its biggest share since the investment boom of 2009.

In other words, so far the leadership's attempts to rebalance the economy have backfired, with China's growth becoming more, not less, dependent on investment.

As if that were not troubling enough, there are also some signs that Beijing's statisticians have been massaging the numbers, and that actual growth has slowed considerably more than the official data implies.

The first signal came last week when finance minister Lou Jiwei warned - in comments hastily revised by official media - that growth this year could fall below 7 per cent.

Some observers believe it has already dipped under that level. Analysts at the independent research house Capital Economics in London compile their own China activity proxy, based on hard numbers like energy consumption and internal freight volumes.

Since the 2009 slump, it has proved largely accurate as an indicator of growth. In recent months, however, Capital Economics' proxy has fallen well below official figures, indicating a year-on-year growth rate for the second quarter of just 6 per cent.

Others calculate that China's slowdown could be even deeper. Economists at the independent consultancy Lombard Street Research have also compiled their own data series for China's growth. Unwilling to take Beijing's figures at face value without the economy-wide inflation data to back them up, they prefer to take the numbers for China's quarterly nominal gross domestic product and deflate them by the available price indices.

In stark contrast to the official quarter-on-quarter growth figure of 1.7 per cent, their preliminary estimates based on yesterday's data show China's inflation-adjusted GDP actually contracted in the second quarter of the year compared to the first quarter, falling by 0.2 per cent.

Although Lombard Street's analysts expect to revise their estimates as further price data becomes available, they warn that "it's highly likely that real GDP growth was minimal if not negative".

This grim picture has several implications. First, it means we can expect a dismal corporate earnings season, with profit growth for mainland companies largely wiped out.

Second, if the leadership maintains its tough stance, stalled growth will soon begin to erode household earnings growth, further slowing consumer demand.

In that case, China's economy could even fall into recession. Just don't expect the slump to show up in Beijing's rosy official data.