Julian Evans-Pritchard on Chinese growth prospects

I first became aware of Julian Evans-Pritchard last year, and on September 8th I did a post reporting his relatively upbeat views on Chinese growth prospects. Seven months later we have received three more Chinese GDP reports, and it’s clear that Evans-Pritchard was right, at least relative to my more pessimistic view (I predicted 6.0% growth for China, the actual number is likely to be at least 6.5%).

So it’s worth revisiting Julian Evans-Pritchard, to see his current views on the growth prospects of the world’s largest economy (reported in the FT):

While GDP growth might have notched a slight fall from the fourth quarter of 2015, at Capital Economics, Julian Evans-Pritchard pointed to signs from recent data that momentum was improving heading into the second quarter:

The slowdown was concentrated in the service sector, where growth slowed from 8.2% y/y to 7.6%. We won’t get the full breakdown until tomorrow but we suspect that this was predominately due to weaker financial sector growth. Stock market turnover surged in Q1 of last year due to the equity bubble, but it has since come back down to earth. Growth in the secondary sector, which covers industry and construction, held up better, although it nonetheless edged down somewhat from 6.1% y/y to 5.8%. …

Looking ahead, we think it makes sense to focus on the monthly data for March in order to gauge the economy’s current momentum. These beat expectations across the board. In particular, the sharp pick-up in industrial production and investment leaves us hopeful that growth has now bottomed out for the time being, with looser monetary and fiscal policy likely to result in a cyclical upturn over the coming months.

Services are now more than half of the Chinese economy, and in Q1 that proportion continued to grow (and is likely to continue growing for many more decades). Chinese data is YoY, so by the second half of this year the service sector growth may speed up, as the decline in finance during the second half of 2015 will drop out of the YoY comparisons.

Here are some more bearish views, which also seem reasonable:

At Moody’s, Marie Diron sounded a wary note, pointing to other economic indicators where a rise was less welcome:

The very large increase in investment by SOEs, at 23.3%, points to a further rise in leverage and fall in return on assets in the sector, a negative signal for the sustainability of growth.

Policy measures have also contributed to a recovery in real estate, with a marked increase in floor space started in Q1. However, if the capacity that is created does not match migrants’ demand in terms of quality and location of housing, the risk of a renewed correction in the property sector will build.

Tom Rafferty, Asia economist at the EIU, concurred, suggesting property investment was unlikely to see sustained strengthening. He went on to drive home a point many economists have touched on recently – that China’s structural problems go deeper:

Today’s released data ought not to distract from the fact that the structural issues facing China’s economy remain unresolved. It has taken considerable monetary and fiscal policy loosening to stabilise economic growth at this level and this effort has distracted from the reform agenda that is fundamental to long-term economic sustainability. Levels of debt within the Chinese economy are too high and we are concerned that the authorities are not moving quickly enough to address the issue.

While today’s data points to upside risks to our forecast of 6.5% expansion in 2016 as a whole, we still believe that growth momentum will falter in coming months. Looking further ahead, we are very sceptical that the government’s targeted 6.5% “floor” for annual economic growth over the next five years will prove attainable and the risk of a sharp economic slowdown, or hard-landing, will persist.

As I’ve said before, I think China’s biggest economic problem is over-investment in third tier cities, and the excessive debt used to finance that malinvestment.  Back around 2000, people talked of “bubbles” in places like Shanghai’s Pudong district, a prediction that looks ridiculous today.  But the third tier cities are more worrisome in my view, as I think the Chinese people will increasingly move toward the first and second tier cities.  Property prices are ridiculously high relative to income, in places like Beijing and Shanghai.  But property prices should be ridiculously high relative to income, in places like Shanghai and Beijing.  Those are the next Tokyo/New York/London-type cities, while interest rates are low, and will stay low.

PS.  If you wonder why China is so important, consider the following:

The U.S. dollar rallied and major stock markets rose on Wednesday after JPMorgan’s results beat lowered expectations and upbeat Chinese trade data offered hope Asia’s biggest economy is finally stabilising.

The euro fell nearly 1 percent versus the greenback as stronger Chinese economic growth boosted recently batted-down expectations that the Federal Reserve could raise interest rates again in the not-too-distant future.

Equity markets as far flung as Hong Kong and Germany rose sharply on the recent China data, and it even impacted the likely future path of Fed policy.  When you are the world’s largest economy, you affect everything.

PPS. I recently mentioned that 31 students from my wife’s (Beijing) high school were accepted by UCLA.  I just got some more info. The graduating class included 120 students, and 15 of them got perfect (2400) scores on the SAT—in what for them was a foreign language.  I wonder how many public schools in America have those kinds of scores.  Middle income trap for China? I doubt it.

Meanwhile, back in the States, we have about 500 perfect scores each year, many in California:

About 80 California high school students out of some 234,767 taking the SAT last year scored that perfect trifecta. Of these 80, a stunning one-quarter, or 20, came out of the program at a two-year-old San Diego startup company, Summa Education Services, founded by Chief Executive Chris Hamilton and his partners Andrew Chung and test-whiz Karl Hagen.

.  .  .  Hamilton needs to leave his modern Carmel Valley office, where chairs are piled high with new hard-bound novels he hands out like strawberry pancakes. Time to teach a class on reading comprehension. It is a discrete sea of energetic Chinese/Korean/Indian faces.

I find this kind of sad—what a waste of time in such an affluent society.


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20 Responses to “Julian Evans-Pritchard on Chinese growth prospects”

  1. Gravatar of John Hall John Hall
    15. April 2016 at 09:25

    When anyone gets a perfect score on the SATs, I worry that they study too damn hard and should go have some fun.

    When 15 students out of a class of 120 from a school in China get perfect scores, I worry about cheating.

  2. Gravatar of E. Harding E. Harding
    15. April 2016 at 09:26

    “The graduating class included 120 students, and 15 of them got perfect (2400) scores on the SAT—in what for them was a foreign language.”
    “Of these 80, a stunning one-quarter, or 20, came out of the program at a two-year-old San Diego startup company, Summa Education Services, founded by Chief Executive Chris Hamilton and his partners Andrew Chung and test-whiz Karl Hagen.”

    -All this is more consistent with cheating than with natural good performance. Asian cheating is notorious, especially on the SAT. It’s on an industrial scale. See Education Realist’s blog for more info.

  3. Gravatar of HL HL
    15. April 2016 at 09:31

    Ahh…. I would be a bit careful on that perfect SAT story as I once ran an SAT prep place in Seoul’s wealthy district (the usual station for young Korean US college grad needing some extra income on the side)…yes, the kids are smart, but many of them benefit from some extra boosters on the side. In those days, I lost many students simply for being more scrupulous…the ETS system is so porous, it is becoming a joke among resourceful Asian students.

    There was a huge boom in “Korean high school to US college”, just as a primer. Basically the same story of amazing perfect SAT scores from South Korea.
    http://www.nytimes.com/2008/04/27/world/asia/27seoul.html

    A common occurrence in Asia since the 2000s
    https://www.washingtonpost.com/news/answer-sheet/wp/2015/03/02/yet-again-sat-scores-in-asia-withheld-because-of-cheating/

    Again, not trying to tarnish anyone who does well on the exam….it is a bit more complicated. Still, at the end of the day, the kids are smart!

  4. Gravatar of HW HW
    15. April 2016 at 14:07

    I wonder how many would bring up the cheating issue if they were white.

  5. Gravatar of Chuck Chuck
    15. April 2016 at 16:17

    It’s irresponsible for Western economists to admonish China for over-investment. China is poorer than Mexico! Would any Western economist dare tell Mexicans to stop working so hard and live a little?

    I’m not accusing Scott of this. He seems to understand the problem is wasteful investment not over-investment.

  6. Gravatar of Benjamin Cole Benjamin Cole
    15. April 2016 at 16:29

    I am beginning to wonder about the “China will fail” crowd. Is ideology trumping detached observation?

    You know, for decades we were told that if the US federal budget runs a chronic deficit we would have runaway inflation.

    We were told that is QE was conducted we would have runaway inflation and ruin.

    Others said if the US ran chronic and large trade deficits we would end up impoverished.

    There is always somebody predicting doom as their prescriptions are not being followed.

    We are told the Chinese government misallocates resources, but no one ever says the one trillion dollars a year to the US national security complex is a misallocation of resources (which it is, in classic economic terms).

    Then there is the curious reality that the People’s Bank of China can print money and buy sour loans. It is rarely mentioned that when a loan goes sour it is not a loss to the whole economy. The lender loses what the borrower gains.

    If the Chinese banking system is made whole by the PBOC, then they are fine (with the exception of moral hazard). The problem with bad loans is when they crimp your banks, and your banks stop lending.

    I would like to see a figure on the misallocation of resources as a fraction of China GDP versus the misallocation of resources in the United States.

    Probably it is a mistake in China to try to herd the population into 2nd or 3rd tier cities. On the other hand sometimes smaller cities are highly desired such as Portland or Kyoto. If an effort is made to make those smaller cities extremely attractive to live in, and if the constructed housing falls in price, they probably have an out.

    If you want a real problem, try building not enough housing, as in the United States. From what I see, living standards are lower in Los Angeles than 50 years ago.

    And we are giving advice to the Chinese? Please, send China’s home builders to Los Angeles and Pacific Grove.

    By the way, Chinese tourism—that is Chinese visitors offshore—is booming booming booming booming booming….

  7. Gravatar of ssumner ssumner
    15. April 2016 at 17:56

    John, All the elite schools accepting these students don’t seem concerned.

    HW, Interesting that Asians also do extremely well in the US. Are they also cheating on SAT exams in the US, at much larger numbers than other races? Possible, but I doubt it.

    Chuck. Yup.

    Ben, Yes, Chinese tourism is booming.

  8. Gravatar of Thiago Ribeiro Thiago Ribeiro
    16. April 2016 at 02:28

    “It’s irresponsible for Western economists to admonish China for over-investment. China is poorer than Mexico! Would any Western economist dare tell Mexicans to stop working so hard and live a little?”
    The issue is, assuming there is malinvestment now, where schould the money have been invested, by whom and where is the incentive to get it right? People don’t malinvest because they like it, they are trying to make investments that make sense. Maybe there is an upper bound to how much a country is capable to invest wisely in each turn. Money (specially fiat, debt-created money) may not be the limiting factor here

  9. Gravatar of HW HW
    16. April 2016 at 03:13

    In Australia those of Chinese descent outperform students in Shanghai in maths, scoring above US Asians by more than 60 points. For comparison that’s larger than the actual performance gap between the US and Japan.
    http://www.afr.com/news/policy/education/chinese-students-do-better-in-australia-20140831-jdge9

    Also I’ve never believed the stereotype about large-scale cheating (relative to other races), I was only trying to point out that people give whites the benefit of the doubt to a larger extent than they do for Asians, on cheating.

  10. Gravatar of ssumner ssumner
    16. April 2016 at 06:29

    HW, Good point.

  11. Gravatar of Saturos Saturos
    16. April 2016 at 06:39

    off topic again, but Scott Will Like This: so the p-hacking problem, which Scott quaintly refers to as “data-mining” (we use that term for something else now), is actually worse than you may have thought: http://www.slate.com/articles/health_and_science/science/2013/07/statistics_and_psychology_multiple_comparisons_give_spurious_results.html

    I wonder how this applies to economic research?

  12. Gravatar of Saturos Saturos
    16. April 2016 at 06:46

    (the infinitely tweakable parameters of DSGE models come to mind.)

  13. Gravatar of Saturos Saturos
    16. April 2016 at 06:47

    A longer version of the same thing:
    http://www.stat.columbia.edu/~gelman/research/unpublished/p_hacking.pdf

    Andrew Gelman is director of the center for applied statistics at Columbia. You may have seen the link to his blog in Tyler Cowen’s sidebar.

  14. Gravatar of ssumner ssumner
    16. April 2016 at 07:10

    Saturos, Yes, I’ve actually commented on Gelman’s work, he’s excellent. Unfortunately, what you describe is also very common in economics.

  15. Gravatar of Saturos Saturos
    16. April 2016 at 18:36

    The beautiful thing in the Slate.com article is the examples he gives (particularly the salmon) of “testing your tests” when there is reason to suspect them. Perhaps all of science could be fixed if only we carried it out to sufficiently many levels of meta. (Then again I here there’s a group of young people in California trying to do exactly that…)

  16. Gravatar of Saturos Saturos
    16. April 2016 at 18:50

    Scott, ok, so, what can we do to ensure this problem doesn’t afflict market monetarism as well? Does it only apply to controlled studies in journals or also to the casual empiricism and occasional econometrics done on this and related blogs?

  17. Gravatar of E. Harding E. Harding
    16. April 2016 at 20:19

    “John, All the elite schools accepting these students don’t seem concerned.”

    -Obviously. They get to pay the out-of-state tuition.

    “HW, Interesting that Asians also do extremely well in the US. Are they also cheating on SAT exams in the US, at much larger numbers than other races?”

    -No, Sumner, it’s due to selective immigration. Look, for example, at Indian-Americans.

  18. Gravatar of E. Harding E. Harding
    16. April 2016 at 21:36

    “Are they also cheating on SAT exams in the US, at much larger numbers than other races?””

    -Scratch my “No, Sumner”; it’s “yeah, probably, but that’s not the main driver their success”.

  19. Gravatar of ssumner ssumner
    17. April 2016 at 05:22

    Saturos, It can occur anywhere, even in this blog. Even more so in the comment section. 🙂

    Harding, There was also “selective immigration” into my wife’s former high school.

  20. Gravatar of Zamba Zamba
    24. April 2016 at 13:37

    Scott,

    I also doubt China will trap in the middle income. I’m not an expert in asian economies, but it looks like China is following the path of Japan and Korea. A high investment rate combined with education. People may believe that they won’t develop good institutions, but it looks like they can have enough to sustain productivity growth. Maybe they won’t end with US GDP per capita, but definetly much higher than Latin America.

    meanwhile, here in Brazil, we live a 35-year old productivity stagnation. Now that’s middle income trap…

    Have you ever been to Brazil? just a curiosity…

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