The fine print on China’s GDP
RAYMOND YEUNG, CHIEF ECONOMIST, GREATER CHINA | JANUARY, 2019
There’s a discrepancy between market perception of China’s economy and its gross domestic product figure, stemming partly from a lack of confidence in government statistics.
Data shows China’s official GDP growth fell to a 28-year low in 2018, climbing just 6.6 per cent. Growth in the December quarter was 6.4 per cent, down from 6.5 per cent in the previous quarter.
The lack of volatility in the GDP print has not reflected the corresponding change in the value of China’s industrial production (which has fallen sharply), unless you are sufficiently open-minded to believe in the emergence of the services economy, of which the real value is difficult to quantify.
“Exports will contract amid the ongoing trade conflict but don’t expect the type of sharp contraction in activity seen in 2012, 2008 & 1989.”
-RAYMOND YEUNG, CHIEF ECONOMIST, GREATER CHINA
China’s services industry is forecast to grow 7.4 per cent in 2019. Data from listed companies in the sector confirm strong growth and in 2018 six out of 11 categories of service firms registered double-digit revenue growth.
But the global impact of the non-tradeable nature makes this structural shift towards service-driven growth less relevant to other countries.
Many research houses have opted to develop their own proxy indices to measure Chinese growth, typically by blending a group of monthly indicators. However this practice offers little insight into the nuances in Chinese policymaking.
In ANZ Research’s view, China’s GDP figure has been sensitive to the seasonally adjusted factors imposed by China’s National Bureau of Statistics. But the Bureau’s numbers often change, making growth estimates imprecise.
ANZ Research expects Chinese GDP to grow 6.3 per cent in 2019, reflecting a forecast for gradual slowdown. Exports will contract amid the ongoing trade conflict but don’t expect the type of sharp contraction in activity seen in 2012, 2008 and 1989.
Prices are supposed to reflect underlying supply-demand conditions. For an economy as large as China’s, GDP data released 21 days after the quarter has ended is a poor gauge of activity.
Instead, price changes can indicate if the economy is overheated or underutilised. Producer prices are largely determined by the free market, unlike many CPI items which are dictated by the government. The recent downturn of PPI certainly points to waning growth momentum.
China’s GDP remains relevant. An aggressive target of say, 6.5 per cent for 2019 will reinforce the government’s countercyclical stance.
In developed countries a negative gap between potential and actual output will prompt easing or tax cuts. In China the gap also represents their bottom line.
It’s important to bear in mind Chinese President Xi Jinping has ordered China to celebrate the 70th anniversary of the People’s Republic of China with a good economic performance. Such a stance is costly.
Lacking a major productivity breakthrough with a shrinking labour force, China will still boost credit in a Cobb-Douglas production framework. The People’s Bank of China will continue to cut the reserve requirement ratio every quarter.
China may go back to the same old property driven growth model. In 2019 its GDP slowdown may decouple from financial market performance.
Raymond Yeung is Chief Economist, Greater China at ANZ
This story is an edited version of the ANZ Research report “China in ten charts - the meaning of China's GDP”, published on January 21, 2019. You can read the full, original report HERE.
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