May 8, 2017

Economic growth in China is rising, but it is nowhere near the official target

by Fathom Consulting

Fathom’s own estimate of the pace of economic activity in China supports the official story in one respect – the world’s second largest economy did indeed slow through 2014 and 2015 before staging a recovery through 2016 and into 2017. But that is where any similarity between our China Momentum Indicator (CMI), and National Bureau of Statistics (NBS) estimates of GDP growth, comes to an end.

The Fathom CMI combines rail freight volumes, electricity production and nominal bank lending – identified by Premier Li Keqiang as giving a better indicator of economic activity than the official estimate of GDP. It has risen month after month since the beginning of last year as Beijing has thrown in the towel on rebalancing and doubled down, returning to the old model of growth through a combination of fixed investment and net trade. Nevertheless, the CMI suggests that growth is still only 3.4%. That is a long way south of the official estimate of 6.9%.

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We see growth continuing to strengthen in China through this year and into next. But this is not good economic growth. By continuing to invest in capacity, China is storing up more problems for the future. As growth in China’s capital stock continues to outpace overall economic growth, its substantial non-performing loan problem can only get worse. Meaningful rebalancing, away from investment and towards consumption, can only take place when and if the government in Beijing begins to redistribute from the wealthiest citizens towards the poorest. Analysis of Gini coefficients before and after taxes and benefits confirms that China does almost no redistribution at all. Contrary, perhaps, to the conventional wisdom, it does far less than the US and indeed most advanced economies.

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