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China Figures Suggest Tough Landing Ahead | The Mesh Report

China Figures Suggest Tough Landing Ahead

the Mesh Report Staff April 15, 2015 Comments Off on China Figures Suggest Tough Landing Ahead

China’s Statistics Bureau has published the country’s GDP figure for the first quarter of 2015 – a growth rate of 7%.

For most Western markets that’s an enviable figure. For China though, it represents the slowest growth for six years.

Yet the Chinese government says this is the “new normal”. Gone are the days of double digit growth.

It says 7% is “within a reasonable range” and in line with controlled adjustments designed to slow the economy down to a level of sustainable growth.

China is in the midst of shifting its economy from an export-based market to one driven by domestic consumption.

Since the global crash of 2008, China has been unable to rely on its exports to drive its economy.

Despite a partial recovery globally, trade growth across the world remains well below pre-crash trends. So China is trying to increase the spending power of its own people.

The question is whether the declining GDP figures over the past 18 months or so point to a controlled slowdown or hard landing.

“Slower growth should not be viewed as bad news if it means the economy is adjusting to a more sustainable path,” says Andrew Colquhoun, head of Asia-Pacific Sovereigns at Fitch Ratings.

“But the adjustment needs support from consumption while the economy adapts to slower investment. It’s sobering that the economy has become so reliant on construction and real estate to generate jobs.”

The property market is a key risk for the Chinese economy. It makes up about 15% of GDP.

Take a look at our recent visit to a Chinese ghost city for a snapshot of the property market in China.

A breakdown of the first quarter (Q1) figures for this year is revealing too. Industrial output grew at a rate of 5.6%, down from 6.8% in the fourth quarter (Q4) of 2014.

The predicted rate for Q1 was 6.9%, so the actual rate was slower than expected. Factories were shut for some time over Chinese New Year, which falls in Q1, but analyst predictions would have taken this into account.

Retail sales in Q1 of 2015 grew 10.2%, with the prediction for 10.9%. The figure in Q4 of 2014 was 11.7%.

Given that the plan is to increase domestic consumption, this isn’t a good trend.

It’s also odd that retail sales would be slow during Chinese New Year when people would traditionally be shopping.

China’s crackdown on corruption might be part of the explanation: the tradition of buying “gifts” (bribes) at Chinese New Year is on the decline.

A final thought. Can we trust the 7% figure? Could the true figure be different?

China’s Prime Minister Li Keqiang once said that GDP figures were “for reference only”. For the true figure, he said, look at things like electricity output.

Erik Britton from UK consultancy Fathom has done just that.

His firm’s analysis of Chinese rail freight, electricity production and bank lending, suggests that Chinese growth is running at closer to 3%, not the 7% Beijing is boasting.

That, says Mr Britton, is a hard landing in the making.



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