July 17, 2015

News In Charts: China – A Tale Of Two Economies

by Fathom Consulting

This research note is provided by Fathom Consulting. All of the charts below and many many more, covering a range of topics and countries on both the macroeconomy and financial markets are available in the Chartbook to Datastream users at www.datastream.com. Alternatively you can access Fathom’s Chartbook at www.fathom-consulting.com/TR.

With its usual efficiency, China’s National Bureau of Statistics released its 2015 Q2 growth estimate earlier this week. Reportedly, GDP rose by 7.0% in the four quarters to Q2. We remain sceptical about the accuracy of China’s GDP data, and the speed with which they are compiled. Our own measure of economic activity — the China Momentum Indicator — suggests the current pace of growth is nearer 3.0%.

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China’s National Bureau of Statistics released its first estimate of second quarter GDP growth on Wednesday. This timely release, which beat most national statistical agencies by several weeks, claims that output expanded by 7.0% in the four quarters to 2015 Q2. On a quarterly basis, the economy expanded by 1.7%. This was up from 1.4% in Q1, the weakest pace since seasonally-adjusted data were first published back in 2010.

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Following weeks of stock market turmoil, which has left China’s benchmark Shanghai Composite equity index down nearly 30%, these data have confounded expectations. However, as our clients will be aware, we have been sceptical about the accuracy of China’s official data for some time. Accordingly, the fact that reported economic growth held steady at its target rate of 7.0% is of little surprise to us. Indeed, since end-2013, our measure of economic activity has deviated from that reported by the National Bureau of Statistics by an increasingly wide margin. As such, our China Momentum Indicator (CMI) for May suggests that growth could be as low as 3.2%.

This week’s industrial production and bank lending press releases provided us with two of the three component parts for our June CMI. With regards to the former, we look to electricity production to help gauge underlying economic activity. This was up 0.5% in the twelve-months to June, a small improvement on May’s data.

Our second indicator, net new bank lending, rose by 1.5% in June — the fastest pace of expansion since January. Rail freight volumes, the final component of our June CMI, should be available by the end of the month.

chart 3 china nominal bank loads
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A separate data release showed that corporate bond issuance had gained momentum — a means of financing that the People’s Bank of China appears keen to support. Indeed, earlier this week, it relaxed rules which should enable more foreign involvment in its domestic bond market. Reportedly, central banks, supranational institutions and sovereign wealth funds will no longer be subject to pre-approval or quota allocations when accessing the interbank bond market. Lately, China’s central bank has been intervening in the foreign exchange market in a bid to counter the effect of capital outflows and to shore up the renminbi.

chart 4 social financial breakdown
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chart 5 foreign exchange reserves
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In conclusion, although policymakers are reluctant to admit that China has slowed dramatically, the recent onslaught of measures aimed at stimulating the economy surely hints at their discomfort. While these measures may temporarily alleviate the downward pressure, they do very little to resolve China’s long standing problems of excess capacity, non-performing loans and perennially weak household consumption.

Accordingly, as China tries out the full range of its policy levers, we believe that eventually it will resort to exchange rate depreciation. Its recent heavy-handed intervention in the domestic stock market has demonstrated afresh its disregard for financial reform.


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