China’s GDP figures

Last June the consensus forecast called for 6.9% RGDP growth in China in 2015, and 6.8% growth in 2016.  A week ago the consensus called for 6.9% in 2015 and 6.4% in 2016.  Today China announced that 2015 growth came in at 6.9%, right on the consensus forecast.  Nominal GDP grew by 6.4%. The fourth quarter RGDP growth rate was 6.8%, with nominal growth of only 5.8%.  A few comments:

The data may be fake, and hence meaningless, but global stock and commodity markets rallied on the news.  Bond yields rose. That tells me the data is probably not meaningless, although clearly it may be biased (and the market may be filtering out that bias, looking for the grains of truth within.)  It’s interesting that global asset markets seem to respond more strongly to the supposedly meaningless Chinese data than to the US GDP data.  If the markets are interested, then market monetarists are interested.

The transition from industry to services continues:

Resilient growth in the emerging services sector helped cushion the slowdown in manufacturing and construction. The services sector grew 8.2 per cent in real terms in the fourth quarter versus 6.1 per cent for the industrial sector. . . .

Fixed-asset investment — which covers infrastructure and factory construction — grew 10 per cent in 2015, the weakest full-year growth since 2000 and down from 10.2 per cent in the first 11 months of the year. Infrastructure was the biggest drag, as growth fell back in December after fiscal stimulus had sparked a brief rally in previous months.

“The GDP figure looks fine but the disappointing part is very weak fixed-asset investment,” said Zhu Haibin, China economist at JPMorgan in Hong Kong.

“It raises questions about how effective fiscal policy has been. A big concern is whether the manufacturing slowdown will cause big unemployment. But if the service sector is resilient, that will create new jobs. The divergence in the economy will continue,” he added.  .  .  .

While the rebalancing of the economy away from manufacturing and construction continued, services growth slowed from 8.6 per cent in the third quarter as the contribution from financial services weakened.

“Based on this data, policymakers definitely need to do more,” said Xu Gao, chief economist at Everbright Securities in Beijing.

“The slide in services growth was expected, given the stock market. That’s going to continue in 2016, so if there’s not a clear recovery in the industrial sector and infrastructure investment, it will be very tough to meet next year’s 6.5 per cent target.”

And Reagan would be pleased by this, but will they carry through?  (I say only about 20% of what they should do.)

At the outset of his presidency, Xi Jinping billed himself as a transformative leader in the mould of Deng Xiaoping, the Chinese strongman who set the country’s economic rise in motion in the 1980s. Now Mr Xi is turning to two more political giants of that decade — Ronald Reagan and Margaret Thatcher — for inspiration as he seeks a “supply side” revolution for China’s economy.

Like the late US president and UK prime minister before them, Mr Xi and his premier, Li Keqiang, want to reduce taxes and red tape for businesses as they seek to cushion the decline of heavy industry with the rise of the consumer and service sectors. . . .

While there is no denying the dynamism of China’s consumer and service sectors — many of them dominated by private and foreign enterprise — the government has not traditionally been willing to take decisive action to reduce industrial overcapacities.

“Mergers and acquisitions rather than bankruptcy and liquidation would be the [government’s] preferred approach to ‘zombie companies’,” Tim Condon, ING chief Asia economist, wrote last week. “The industrial restructuring debate frequently pits Anglo-Saxon restructuring, where costs are recognised up front, against Japan-style restructuring where concessions and debt relief spread the costs over time. We see the [Chinese] authorities adopting an in-between approach.”

Another FT post has my view of the situation:

In a China-watching community where those at the extremes — “maximum” bulls and “coming collapse” Cassandras — often make the most noise, Jonathan Anderson at the Shanghai-based Emerging Advisors Group has long been regarded as one of the most thoughtful analysts. For years he laid out a convincing case for cautious optimism on the Chinese economy, but not any more.

“For years we have been waiting for China to make the tough choice and sacrifice near-term growth in order to stabilise macro balance sheets and stop its exploding debt cycle,” he wrote on January 4, the first day of this month’s market and currency mayhem. “[But] the costs of taking real adjustment are clearly too high for the government to bear . . . Right now we put the initial potential crisis threshold at around five years.”

China will likely eventually face some sort of financial crisis, but it’s impossible to predict when.  So the safest prediction is for continued rapid growth, slowing gradually over time.  I am predicting 6.0% growth for 2016, and hence am more bearish than the consensus.

In terms of policy, they need a more expansionary monetary policy and a more contractionary credit policy.  A 10% devaluation of the yuan would make restructuring less painful.



23 Responses to “China’s GDP figures”

  1. Gravatar of Paul Paul
    19. January 2016 at 07:34

    have you written previously on the distinction between monetary and credit policy? cheers.

  2. Gravatar of E. Harding E. Harding
    19. January 2016 at 09:11

    Agreed on everything here. I’m actually very surprised at the market response.

  3. Gravatar of Miguel Miguel
    19. January 2016 at 11:07

    So, in your opinion, this is just the moment to buy stocks, after the big fall due to the doubts around China. Once doubts are off, stocks are cheap. I don’t buy it. I don’t think that China’s problems are over. Larry Summers says that the best indicator of the near future of an economy is the velocity of capital flying. I agree.
    China’s foreign reserves have fallen by about 2/3 since june, that is, Chineses are flying their money at a high velocity, which is not precisely a good sign for the exchange rate stability. China is at risk of financial crisis because its diverging needs of internal (expansionary) and external (depreciation) monetary policy.
    I don’t know any case of this type of contradiction that have not end in catastrophe.
    China is not a question of real economy.

  4. Gravatar of Benjamin Cole Benjamin Cole
    19. January 2016 at 11:33

    I think this blog post is about right.

    Capital flight? China still runs huge trade surpluses and has its own money printing press. They are far, far below PBoC inflation targets.

    Let’s hope several trillion dollars leave China, investing in Western economies and stimulating growth while the PBoC prints up a few trillion more.

    Actually, if we could just get the capital flighters to spend and not invest their money In the U.S……

    BTW, the Monetary Authority of Singapore is playing the central banker sadomonetarism game….

  5. Gravatar of Njnnja Njnnja
    19. January 2016 at 11:47

    There was an excellent graph in this morning’s WSJ (that I can’t seem to find right now) that showed historical growth versus the target. Sometimes growth really exceeded the target, but during periods of lower growth, somehow, growth was sufficient to almost always meet the target (or miss by just a tiny amount). More interesting was the way the target would be lowered when growth slowed, but just the right amount so that the target was still met. So yes the data is probably fake, but it’s more likely a “smoothed” number that is some function of the true rate of growth than it is a complete fabrication. Hence, it is of some value (for those who parse it correctly).

    How do you arrive at your recommendation of a 10% yuan devaluation? Do you have any guesses about where it would be if it was free floating? I know it wasn’t too long ago where you thought it wasn’t very overvalued. And what would the consequences be of too much devaluation, too quickly?

  6. Gravatar of E. Harding E. Harding
    19. January 2016 at 12:13

    “And what would the consequences be of too much devaluation, too quickly?”

    -Belarus, 2011.

  7. Gravatar of Postkey Postkey
    19. January 2016 at 13:04


    “China is at risk of financial crisis . . .”

    This economist agrees with you?

    48 min in.

  8. Gravatar of ssumner ssumner
    19. January 2016 at 14:19

    Paul, I’ll try to do a post on that soon, but here’s one earlier post, from 2014:

    Miguel, I don’t have any ability to predict stock prices.

    Njnnja, The dollar has risen far more than 10% in recent years. So the yuan would still be reasonably strong even after a 10% devaluation. And of course they’ve already devalued about 5%, or a bit more. China’s economy is quite strong in terms of productivity growth, so it’s real exchange rate can gradually appreciate. Thus China doesn’t need to devalue as much as most countries have, relative to to the dollar.

    In other words, the 10% figure is just a wild guess on my part. 🙂

  9. Gravatar of Gary Anderson Gary Anderson
    19. January 2016 at 14:38

    Scott, they talk a lot about the dollar denominated loans the Chinese have outstanding. Any devaluation could crush those loans, right?

  10. Gravatar of Jim Glass Jim Glass
    19. January 2016 at 16:15

    Various opinions on China’s GDP based on indicators such as electricity use and railroad shipments.

    “What is China’s actual GDP?”


  11. Gravatar of E. Harding E. Harding
    19. January 2016 at 16:31

    I linked to a Gallup poll in my Marginal Counterrevolution Assorted Links pointing out that Chinese satisfaction with their financial situation is around 2009-10 levels. So sounds like the growth rate is around that of 2009.

  12. Gravatar of Gary Anderson Gary Anderson
    19. January 2016 at 21:40

    Banks can’t make money lending at low interest rates. They are slowly exiting the mortgage business:

    And that is why interest rates need to be a lot higher at the long end, but they won’t get there due to massive demand for long bonds as collateral.

    I told people that rates must rise on the long end for banks to lend to residential and most people thought I was wrong.

    As for China, lots of loans made at higher rates, and chart don’t lie, rates are declining like a rock. That should make those mortgages profitable for the Chinese banks, but banks will be afraid to lend going forward, causing the prices to fall.

  13. Gravatar of ssumner ssumner
    20. January 2016 at 05:53

    Thanks Jim.

    E. Harding, I don’t think you can go by that, in 2009 growth was about 10%.

  14. Gravatar of Ray Lopez Ray Lopez
    20. January 2016 at 09:01

    Sumner: “Today China announced that 2015 growth came in at 6.9%, right on the consensus forecast” – the consensus I saw from economist and chess grandmaster K. Rogoff on a CNN Davao (Switzerland, not Philippines) interview was the 6.9% figure was inflated. Don’t let the racist Sumner (who’s wife is yellow not brown I learned from his previous post, which explains his Sinophilia) tell you otherwise.

  15. Gravatar of baconbacon baconbacon
    20. January 2016 at 09:19

    “The data may be fake, and hence meaningless, but global stock and commodity markets rallied on the news. Bond yields rose. That tells me the data is probably not meaningless, although clearly it may be biased”

    So do you alter those priors after today’s action? Markets bounced on the announcement, and all gains and then some have been erased today. Either Chinese economic data is so unimportant that the blip lasted a single day, or markets parsed the data and decided it wasn’t so rosy or unknown/unexplanined market action X overwhelmed.

  16. Gravatar of E. Harding E. Harding
    20. January 2016 at 09:47

    Reported Chinese growth for 2009 was 8.7%. No doubt, this is an overestimate, but probably not a huge one (four percentage points or more); we can see that from Australia, which had only a very mild recession in 2008-9.

    Ray is a massive hypocrite.

  17. Gravatar of TallDave TallDave
    20. January 2016 at 10:52

    I agree those are definitely the proper monetary and fiscal responses, but the world’s reliance on official Chinese data that we all know is wrong (if we disagree how much) really scares me, it speaks to the opacity of their system, and reminds me so much of what happened in Asia while I was finishing my accounting degree — that crisis was triggered by the discovery a relatively large company had a lot of fictitious revenue, trust collapsed, investors panicked, stocks fell, and the whole thing ended in broken pegs and devaluations and lower living standards.

    I’m very afraid that’s what’s going to happen to China if they don’t bite the bullet and voluntarily float sometime in the next couple years. Unfortunately, very unfortunately, I think the regime does believes floating will cause major political upheaval, so they’ll try to ride this out (even as many officials cash out and flee the Sword of Damocles), praying that growth will continue to save them.

    Hopefully they are smart enough to see what’s coming and committed to China enough to do what’s right, even if costs them power.

  18. Gravatar of Steven Kopits Steven Kopits
    20. January 2016 at 15:42

    That’s entirely uncalled for, Ray.

  19. Gravatar of Miguel Navascues Miguel Navascues
    20. January 2016 at 17:20

    Cole, one of the two source of data is wrong, in any case, if confidence is broken, capital can fly in spite of CA surplus. We have see that in Greece, and in Spain. BoP is a current and capital account, and can be broken with or without CA surplus.

  20. Gravatar of Ray Lopez Ray Lopez
    20. January 2016 at 18:12

    @E. Harding- what you taking about? I’m referring to Sumner’s 6.9% figure, not figures of yesteryear.

    @Steven Kopits – what you talking about? What is uncalled for? You some sort of Grand Old Man where you engage in mystery writing with one-line ambiguous barbs and we’re supposed to nod our heads in fond agreement? you. FYI Sumner himself referred to his wife as ‘brown’ a while ago. If you don’t read this circus blog do try and keep up.

  21. Gravatar of ssumner ssumner
    21. January 2016 at 07:14

    baconbacon, You don’t seem to understand asset price theory. Asset prices are (roughly) a random walk, and hence all changes are essentially permanent.

    The market later moved on other news? What a surprise!

    E. Harding, I’m surprised you don’t like Ray, he’s a lot like Trump.

    Talldave, I thought you were claiming that what was going to happen in China was very different from what happened in South Korea. Now you compare it to the 1998 crisis. Which is it?

    Ray, That’s right, I’ve been hiding the fact that she is Chinese. My shameful secret.

  22. Gravatar of Steven Kopits Steven Kopits
    21. January 2016 at 09:28

    Ray –

    I found your comment offensive and inappropriate.

    If you make those types of comments, yes, you will hear from me.

  23. Gravatar of TallDave TallDave
    21. January 2016 at 10:29

    Scott — I certainly hope China embraces the South Korean model, but I’m not sure there’s much evidence for that proposition right now.

    “The CCP does not tolerate any form of organized opposition or independent political parties. Citizens who attempt to form opposition parties or advocate for democratic reforms have been sentenced to long prison terms.”

    Unfortunately, right now it looks like they could suffer the same kind of crisis that hit South Korea, Indonesia, Malaysia and Thailand while being considerably more repressive than any of those countries were in 1999. That has the the potential to get very ugly indeed, depending on how well they handle things.

    Watch the reserves. Maybe they can grow their way out of the need for a painful devaluation.

Leave a Reply