The View

China's GDP numbers invite disbelief and pointed jokes

“Smoke…meet mirror,” read a comment in one US business paper

PUBLISHED : Monday, 20 July, 2015, 11:13am
UPDATED : Wednesday, 09 September, 2015, 5:33pm

In the midst of a financial market meltdown, China last week unveiled better than expected GDP growth of 7 percent for the second quarter. Digital networks immediately lit up with jokes, barbs and scorn.

Perhaps the numbers were “hedonically double seasonally adjusted,” someone cracked on venture capitalist Marc Andreessen’s popular Twitter feed.

“Smoke…meet mirror,” read a comment on an article in The Wall Street Journal quoting China data doubters.

“Why not 7.5 percent or even 8 percent? Who gives a %$#*? There is not an ounce of truth in those reports and people on the ground can obviously know that,” a commenter on opined.

Doubts about Chinese data go back decades – and frankly are sometimes on par with “the moon-landing never happened” conspiracy theories. As if it’s all been faked - the iron-ore freighters steaming through the oceans towards China, the equivalent of 10 Manhattan skylines that went up each year, the vast and smoky industrial zones and trillions of dollars in foreign exchange reserves.

One issue is that China’s decades-long economic expansion defies normal expectations; fantastic booms are supposed to be punctuated by roof-jumping type busts. Another issue is that virtually no-one – not even Premier Li Keqiang – will vouch for the numbers down to the last decimal point. Instead, informed believers take the view that China’s official data is reasonably descriptive of economic activity, if not precisely accurate.

This year, however, China data scepticism seems to be at fever pitch. After all, the construction boom has faded, the corporate sector is deleveraging, electricity output is anaemic, and heavily indebted provinces are resisting Beijing’s calls for more fiscal activism. Where exactly is the growth coming from?

There are plausible explanations for how headline growth can remain stable even as fundamentals weaken and economic risks rise. CLSA, in its post-mortem, pointed out that net exports gave the latest output readings a boost – but that the expansion in net exports was largely a reflection of weak imports, a negative indicator for growth.

Services make up a roughly half of GDP, up from 43 per cent in 2010. This, combined with increased energy efficiency, helps explain the “suspicious” deviation between energy output and GDP growth. Analysts at Jefferies investment bank argue that oil demand, which increased 6 percent year-on-year over the second quarter, “is becoming a better GDP proxy” than electricity.

Unfortunately, the most recent boost in services could prove transitory, as it was tied to a dangerously high-flying stock market. Financials services soared 17 percent YoY in the first half of 2015– and may have contributed to nearly a fifth of the second-quarter GDP expansion, according to one estimate.

Now that the stock markets are in panicked disarray, few expect China can continue to cruise along at the current pace. At least not without throwing reforms out the window and reverting to mindless and excessive infrastructure spending.

In short, one can recognize the challenging fundamentals – one can even be an extreme China bear – while also taking the headline GDP figures at face value.

Yet even so, few do. At least not with the latest batch of figures.

Gavekal Dragonomics, for instance, has long held the view – and still holds the view – that “the issue of statistical falsification in China is greatly exaggerated by the media and some commentators.”

“However,” says head of China research Andrew Batson, “it is also undeniable that inconsistencies or issues with the data increase when the economy is at cyclical troughs or peaks, and it seems clear that we are at such a moment now."

There have always been slight inconsistencies between quarter-on-quarter and year-on-year growth figures provided by China’s National Bureau of Statistics. Recently the inconsistencies have widened - and as the accompanying chart shows, quarterly estimates point to a lower growth trajectory of about 6.5 per cent. Batson thinks the lower QoQ trajectory is “more plausible.”

A little fudge – or “smoothing” if you will - is different from a great lie, or even a “hedonistic double seasonal adjustment.” But it certainly does not inspire confidence, at least outside China.

“Good lord, just last week even Chinese officials were admitting Q2 GDP growth was going to come in below 7 per cent,” the fund manager and financial sinologist Patrick Chovanec tweeted after the report was released. “Nobody believes these China GDP numbers.”