Look at levels

Tyler Cowen has a new post citing some scary data from China, on declining exports.  In this highly recommended video, China expert Julian Evans-Pritchard isn’t at all frightened by the data.  Evans-Pritchard (who obviously knows 10 times more about China than I’ll ever know), seems a bit more optimistic about China’s near term growth than I am.  I am on record predicting that China will slow from the 7% growth in the first half, to 6% over the next year or so.  Evans-Pritchard points out that if you focus on levels, Chinese trade data hit bottom in the first half, and output will probably start recovering from this point forward (although he indicates that August industrial production will be very weak for technical reasons.) The problem is that export growth was extremely strong in the second half of last year. Thus the year-over-year data look bad, but things have actually been improving since early 2015.

Further evidence of Chinese resiliency comes from the oil market:

In China, crude oil imports fell 13.4% in August to 26.59 million tonnes (6.29 million bpd) from the previous month. But they rose 5.6% from a year earlier.

“People are looking beyond the sharp (monthly) drop in Chinese import data and looking at the stronger details contained within it,” Commerzbank senior oil analyst Carsten Fritsch said.

In the first eight months of 2015, China’s crude imports were up 9.8% year-on-year at 6.63 million bpd, on still-solid demand for gasoline and kerosene as a growing middle class drives and flies more.

I’m no China expert, but I’d recommend focusing on things like the consensus forecast of Chinese growth (still well above 6%), as well as the research of people who look beyond the headline data points.

Tyler asks this question about the recent spate of weak data:

Under what required assumptions would this translate into a growth rate of say four percent?  Backward-looking?  Forward-looking?  Or is this just a slow structural shift as the Chinese economy gradually moves into services?  Inquiring minds wish to know.

Evans-Pritchard thinks services and light industry are still doing well, even as construction and heavy industry slow.  This makes sense to me, as even with the recent shift away from investment, China is still investing an awfully large amount. Say what you will about the waste (and I partly agree with you) there’s still enough useful investment being done to lead to a larger and larger flow of consumption each year.  More driving, more flying, more hotel visits, more subway rides, more high speed rail rides, etc., etc.  China’s a slowing juggernaut, but it’s still a juggernaut.

PS.  And while it’s of course dangerous to make too much of short term moves in equity markets, it does seem that global markets moved up today on the Chinese economic news, despite the negative headline figure.  And Japan is opening far higher tonight, again attributed to China.  Of course we shouldn’t draw sweeping conclusions about Chinese growth from this, just that data points aren’t always what they seem.

PPS. Any relation to Ambrose?




22 Responses to “Look at levels”

  1. Gravatar of Ray Lopez Ray Lopez
    8. September 2015 at 18:38

    Why no comments on this important post? Scott is being too modest about his China forecast abilities.

  2. Gravatar of Sina Motamedi Sina Motamedi
    8. September 2015 at 19:43

    Scott, do you have any formal reason for expecting 6% growth (futures markets or some market forecast I’m not aware of)? Or is it just an intuitive thing? You’re not generally one to believe the analysts’ consensus forecast over the market forecast.

  3. Gravatar of E. Harding E. Harding
    8. September 2015 at 20:19

    Last year had a housing slowdown and ~6% growth. This is why I expect same or higher this year, as I expect a housing recovery. Also, China’s cheap oil windfall wasn’t complete in 2014. It is now.

  4. Gravatar of eric eric
    8. September 2015 at 21:22

    For the best perspective on China economics, read Michael Pettis’

  5. Gravatar of Mattias Mattias
    8. September 2015 at 22:26



  6. Gravatar of benjamin cole benjamin cole
    8. September 2015 at 23:06

    I agree with Scott Sumner, but will again express my disappointment that Sumner does not a market monetarist perspective to China. Perhaps there is not enough data released from the People’s Bank of China, but I think the effort might be worth it.

    I sense the PBOC now has marching orders from the CCP, and we will start to see robust growth again.

  7. Gravatar of James Alexander James Alexander
    9. September 2015 at 02:58

    Quite a few private consultancies are suggesting the underlying data has started to diverge from the official GDP data. Consensus forecasts of official GDP will be tied to that data source, so the 6% growth figure isn’t very meaningful.

    See here for respectable questioning of those official growth forecasts by two that had previously agreed with the official figures:

    And I agree that a Market Monetarist perspective would have to be much more concerned given the collapse in NGDP growth that must be having real impacts. You can’t go from 15-20% NGDP growth to just 7% in a short period without some considerable pressure on RGDP.

  8. Gravatar of ssumner ssumner
    9. September 2015 at 04:49

    Sina, It’s based on the fact that I was fooled before. I recall reading all these horror stories in earlier slowdowns, about this or that indicator showing China was in trouble. Then the dust settled and there was just a modest slowdown. Since growth has recently averaged 7%, my guesstimate is that a modest slowdown is 6%. Obviously we need a NGDP and RGDP futures market for China, but alas . . .

    eric, Agree that Pettis is very good, but not perfect. He predicted 3% growth for the decade. It’s half over and averaging 8% so far. Very unlikely his 3% ends up being right. If China has a really bad recession now, he might claim a moral victory. But if not his prediction will look too pessimistic.

    Ben, See my answer to James.

    James, I agree about the NGDP, but isn’t slowing from 14% to 6% RGDP growth a pretty considerable slowdown? That’s more of a slowdown than the US experienced in 2007-09! Also, the NGDP numbers are consistent with what we know about wages and employment in China. If there was massive cheating, it would show up in discrepancies in that labor market data.

    I do think Q3 might be 4% to 5% using quarter over quarter figures (obviously not the official YOY figures.)

    Having said that, I also think the 7% in the first half was slightly overstated. But I’m trying to predict official figures, how else could we possibly establish who was right? If the figures show zero percent growth, people can say I’m wrong. But if they show 6% and people still say I’m wrong, then I would have had no chance of ever being correct.

  9. Gravatar of benjamin cole benjamin cole
    9. September 2015 at 05:00

    BTW coincidence that PBOC top gun says Shanghai decline over…and then it is over?

  10. Gravatar of MFFA MFFA
    9. September 2015 at 07:04

    What is going on with the hyperion NGDP prediction market? It went from 3.6 to 3.2 between my visits from a couple of hours ago and now. Is this related to the job openings numbers (just saw theycame strong)? Stronger jobs -> more chance of a (misguided) fed rate hike -> slower ndgp growth?

    More generally, is anything meaningfull coming out of this expermiment, yet? Would be good to have some view on this

  11. Gravatar of Mattias Mattias
    9. September 2015 at 07:30


    Maybe my comment above was a bit too minimalistic (sent on the phone), but in the link Ambrose EP tweets that Julian is his son.


  12. Gravatar of MFFA MFFA
    9. September 2015 at 07:41

    “In Europe, it seems to me that the preponderant secular stagnation solution needs to be structural reform. Quite apart from the traditional virtues of structural reform, it offers the prospect of creating the legendary new frontier of attractive investment opportunity that will raise equilibrium real interest rates and make possible the achievement of full employment at interest rates that are conducive to financial stability. There is also a strong case, where there is room, for fiscal expansion, particularly in those countries that are running large and substantial current account surpluses.” … “That is not a call for easier European monetary policy. Easier European monetary policy might or might not be availing in Europe, but it would, through the mechanism I just described, increase the extent of contagion. It is a call, as a matter of urgency, for other actions in Europe that operate to increase equilibrium real interest rates and to stimulate economic growth”

    See more at: http://larrysummers.com/2015/05/22/comments-from-ecb-conference/#more-4287

    Is Larry Summers basically saying that the ECB was right to not loosen monetary policy all those years and instead keep their focuss on lobbying policy makers for engaging in structural reforms and fiscal stimulus, or am I reading it wrong?

  13. Gravatar of TallDave TallDave
    9. September 2015 at 07:56

    Hmmmm, having a lot of trouble buying 5% growth YTD. If it was just the exports, it might be a little plausible, but imports look much worse, and profits are flat to declining, so hard to imagine the non-export sectors are doing much better. Seems much more likely growth is something below 2% and possible negative for 2015 thus far.

    Not to say China can’t rebound in 3Q/4Q, but I suspect some combination of inflation being understated and the NGDP statistics being fudged.

    Also, the $93B reserves spent on currency intervention in August is a bit terrifying — even for China, that’s a lot of money. Hopefully they’re going to do the smart thing and let it float, but that may precipitate a banking crisis, but if so that’s a “sooner or later” problem they might as well deal with now.

    And then there’s all the explosions…

  14. Gravatar of James Alexander James Alexander
    9. September 2015 at 08:44

    The FT chart shows RGDP averaging around 10%, slowing to 6% isn’t such a big deal. But who knows, given the difficulties of measuring or given money illusion. It sure felt good at 20%. If we are now unofficially at 0% NGDP it will feel really bad and have real consequences, especially if China stays stuck to US monetary policy.

    If the official data is wrong then it will be hard to have a test. Still, you have been broadly right to be optimistic for a long while, of course.

  15. Gravatar of TallDave TallDave
    9. September 2015 at 08:49

    SCott — Also, the NGDP numbers are consistent with what we know about wages and employment in China. If there was massive cheating, it would show up in discrepancies in that labor market data.

    There was actually a paper on that the other day — apparently China has a semi-official policy of avoiding large-scale layoffs, which explains why the labor data doesn’t correlate to profits/etc quite the way you might expect in an OECD economy, especially when management is still on a career track.

    Also, I’m not sure what non-official sources exist for employment data in China.

  16. Gravatar of Brian Donohue Brian Donohue
    9. September 2015 at 10:36

    All right, place your bets and spin the wheel.

    I’ll be very surprised if Chinese YoY growth comes in under 4%.

  17. Gravatar of James Alexander James Alexander
    9. September 2015 at 12:04

    Take your pick …
    German companies paying up for staff in late 2014 early 2015.

    But some bad figures in the biggest cities from a local recruitment agency, though better in second tier cities.

    And very bad news, increasingly common, about recent sales revenue trends.

  18. Gravatar of ssumner ssumner
    9. September 2015 at 12:30

    MFFA, It’s been clear for some time that the Hypermind market is too thin to pick up high frequency fluctuations in expected NGDP growth. It provides a rough estimate, but we need a far better market, with much more liquidity. That will take money. I’m still working on it.

    Thanks Mattias, I thought they looked a bit similar.

    MFFA. Not necessarily, you’d have to ask him. I’d be surprised if Summers thought the 2011 rate increases were justified.

    Talldave, You said:

    “Seems much more likely growth is something below 2% and possible negative for 2015 thus far.”

    Sorry, but suggesting Chinese growth in the first half might be negative seems just insane. The official data may be wrong, but it’s not that wrong. How would you explain 10% higher oil imports so far in 2015, in an economy with negative RGDP growth? All going into storage? That’s a lot of storage.

    And the no layoff policy probably just applies at the state-owned firms, but that’s a small share of total employment. Mass unemployment is hard to hide.

    I don’t see anyone contenting the arguments I made in the post on why I’m skeptical about the Chinese skeptics. If 2015 has negative growth, wouldn’t the same argument apply to 2009? That year also had lots of horrible looking trade data.

    Brian, Me too, but the recent revision in the way they do GDP makes that far more likely, say 20% instead of 1%.

  19. Gravatar of TallDave TallDave
    9. September 2015 at 13:14

    Scott — Oil volume is up but prices are down by half, and yes they are storing a fair amount of it this year. Import volumes are reportedly down for coal, iron ore, copper, aluminum and steel.

    Seems likely that the Chinese economy shrank from June 2008 to March 2009. Can they bounce back in 2015? Maybe, but this downturn feels a lot more endogenous to China, and the trendlines for the last four years (down) are a lot less favorable than they were for 2005-9 (up).

  20. Gravatar of TallDave TallDave
    9. September 2015 at 13:37

    Or, as Balding pointed out, how can the production grow by 12% while corporate profits and electricity usage grow by 1% and imports decline?

  21. Gravatar of ssumner ssumner
    10. September 2015 at 10:01

    Talldave, I assure you the Chinese economy is not shrinking, that’s just nutty.

  22. Gravatar of Julian Evans-Pritchard On Chinese Growth Prospects – Investor Maven Julian Evans-Pritchard On Chinese Growth Prospects – Investor Maven
    15. April 2016 at 21:31

    […] 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 […]

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