China has again announced fast growth with low inflation. And again, the People’s Republic of China will be widely praised as a future, or even current, economic superpower. Other facts have not changed, however, and in these instances stability is not a laudable goal.
Once more, there are inconsistencies in the most basic and prominent official Chinese data. To the extent official data are reflective, persistent imbalances within the economy are no smaller and may be worsening. The loan stimulus so effective in pushing the PRC past an economic rough patch has now faded. Growth, while still strong, is waning as the stimulus fades, highlighting another round of damage inflicted on the financial system.
What is real?
China’s GDP officially rose 11.1 per cent on-year in price-adjusted terms in the first six months of 2010 to almost $2.54 trillion. As expected, second-quarter growth decelerated, to 10.3 per cent. The consumer price index rose 2.6 per cent, completing a picture of slower but still rapid growth along with contained inflation.
A second glance is troubling, though. The arithmetic comparison of GDP through June 2010 to GDP through June 2009 shows a nominal 23.6 per cent gain. The difference between nominal and price-adjusted, or “real,” growth is the GDP deflator. The deflator measures price increases at 12.5 per cent, sharply at odds with consumer inflation.
An explanation is in China’s data revisions. Beijing issues economic numbers only two weeks after a quarter ends, an impossible feat in the world’s most populous country. One correction for the premature data is supposed to be revisions, but these have not been helpful. China only revises GDP growth higher and does not revise most of its other figures, so revisions render most statistics on the Chinese economy incomparable.
The 2009 revisions seemed better. Overall GDP growth was raised, again, from 8.7 per cent to 9.1 per cent but, for the first time, quarterly breakdowns were provided. These show higher GDP in the first half of 2009, lower on-year nominal growth of 16.7 per cent for 2010, and a reasonable GDP deflator of 5.6 per cent.
It seems odd, however, for such a small revision to real growth to correspond with such a dramatic change in the deflator. It turns out that, although the revisions entailed a sizable decrease in the initial level of GDP for the fourth quarter of 2009, there was no corresponding decrease in real growth for the quarter. One way to represent that disparity is a considerable and convenient after-the-fact reduction in the GDP deflator. It may be that China simply moved an important statistical discrepancy away from the spotlight.
Prices also influence the major components of GDP. The State Statistical Bureau provides poor measurements for investment and consumption, releasing better indicators less frequently and very late. Fixed asset investment rose 25 per cent to near $1.68 trillion - equal to almost two-thirds of GDP, a ratio that climbs as the year goes on. Investment growth is nominal, and real growth would be lower by an unspecified amount.
Retail sales - the official benchmark for consumption - were said to gain 18 per cent to $920 billion. Nominal sales growth was near 24 per cent (unrevised). While this matches investment, the gap between the sizes of investment and of consumption in the first half of the calendar year has ballooned past $750 billion. Stimulus was investment driven and worsened this imbalance. There are also powerful reasons at the sector level to worry about comparatively inadequate consumption, despite its robust growth.
Autos are held up as a stunning consumer success, yet demand cannot match supply. As incentives expire, sales growth is well short of output: sales gained over 30 per cent in the first half of 2010 to near 7.2 million units, while output surged almost 45 per cent to near 8.5 million units. There may also be more data issues. Passenger vehicle sales soared 77 per cent in the first quarter, but gasoline demand edged up only 3 per cent.
Other areas of oversupply are well-known. Steel overcapacity is close to 250 million tons, while retrenchment plans address only 25 million tons. Domestic overcapacity in cement is headed past 1 billion tons. Consolidation of cement, autos, and other industries have sputtered, as the primary goal is to enhance the position of selected state firms rather than curb capacity. Heavy industry is the top user of electricity, so it is no surprise that first-half electricity consumption rose over 21 per cent - twice as fast as GDP - past 2 trillion kilowatt-hours. Industrial consumption rose 24 per cent and comprised three-fourths of this first-half electricity use.
In the financial equivalent of overcapacity, real estate has an unsustainable role in the economy. The ratio of the housing stock as compared to GDP is higher than the US in 2006, before the bubble burst. Yet in the first quarter of 2010, loans for property were nearly a third of total lending and growing twice as fast. For the first half as a whole, real estate investment expanded 38 per cent, easily outrunning overall investment, which was itself too rapid. The value of land purchases skyrocketed 84 per cent.