China data: Making the numbers add up

29 Sep 2015 | Author: | No comments yet »

China data watch: Stabilization by year-end.

The seatbelt sign has been on for more than a year. A 2013 Economic Letter from the San Francisco Fed compared the official GDP data with several alternative indicators constructed from high-frequency data published by China and by its trading partners. Suppose China experiences a 5 percent slump in its own GDP; given an income elasticity of 2, which is reasonable, this would mean a 10 percent fall in imports– but that’s a shock to the rest of the world of just 0.3 percent of GDP. Yet as the United States and Europe – which combined, make up some 50 per cent of global GDP – were muddling their way through the worst recession since the 1930s, China was reporting economic growth of well in excess of 10 per cent per annum.

The same approach, if repeated today, might lead to a different conclusion and show a widening gap between headline GDP growth and high-frequency data. Yet, numerous economic indicators have not reflected this sentiment — from the subdued quarterly GDP growth to declining non-farm credit, from softening rural demand to declining exports. On the same day as Modi was marketing the Digital India initiative in Silicon Valley, it was reported that in September alone, some Rs 6,000 crore was pulled out of capital markets by foreign investors. In any case, the Fed wants to see confirmation that China is not landing hard, and China’s growth can stabilise only if investment and industrial growth stabilises.

Even if the headline real GDP growth continues to show little volatility, main monthly releases including industrial production (IP), fixed asset investment (FAI) and retail sales (RS), can still provide a good indication about the direction of the economy. With one-fourth of the Modi government’s tenure over, and the results of “Modinomics”, as opposed to “UPAnomics”, beginning to show in economic output, the time has come to evaluate the prospects for takeoff. Manufacturing PMI reports may be another reference point, but given their close correlation with IP growth, their value-added is only in their timeliness. The bulls argued that China’s migration of its population from unproductive peasants to educated city-dwellers had many decades to run, and that China’s GDP per head was still a small fraction of that in the US or Japan. As per the CSO report, GDP growth moderated to 7 per cent in the first quarter of 2015-16, down from 7.3 per cent in 2014-15, which is only slightly higher than the 6.9 per cent clocked by the UPA in the turnaround year, 2013-14.

Bank loan growth, one key leading indicator, has been accelerating since mid-year and infrastructure investment growth picked up from 15.5% yoy in July to 20.8% yoy in August. Further acceleration in infrastructure spending is expected in the coming months, which should be able to steady FAI and turn around IP growth (as well as the official manufacturing PMI). © EconoTimes 2015. If all you needed was hundreds of millions of rural workers and a large gap between your GDP and America’s, then India and Indonesia should also be growing as fast as China. The RBI’s Annual Report 2015 points to the urgent need to grapple with important structural constraints and banking asset quality concerns in order to sustain the growth process.

The RBI is understandably concerned about the elevated banking sector risk due to the alarming level of NPAs and the related decline in non-food credit offtake. Republication or redistribution of content provided by EconoTimes is expressly prohibited without the prior written consent of EconoTimes, except for personal and non-commercial use.

Neither EconoTimes nor its third party suppliers shall be liable for any errors, omissions or delays in content, or for any actions taken in reliance thereon. The Indian economy has been known for its domestic consumption-led economic growth model, as distinct from China’s investment- and export-led model. As Warren Buffett observed, “you only find out who is swimming naked when the tide goes out.” The bottom line is that an economic slowdown in China already is a very big deal for some U.S. workers and businesses. The low level of household consumption in China is seen as one of the major reasons for its slowdown, while India has remained insulated from the recent global recession partly because of strong domestic consumption. And that every other economy that had grown in a similar fashion had eventually come unstuck. “In all previous cases of countries following similar growth models, the dangerous combination of repressed pricing signals, distorted investment incentives and excessive reliance on accelerating investment to generate growth has always eventually pushed growth past the point where it is sustainable, leading always to capital misallocation and waste.

Most theorists preach a balance between consumption and investment, and that is what the UPA seemed to have achieved when it hit the golden patch of 9 per cent-plus GDP growth in 2006-09. At this point – which China may have reached a decade ago – debt begins to rise unsustainably,” he said. “China’s problem now is that the authorities can continue to get rapid growth only at the expense of ever-riskier increases in debt. The MGNREGA, increases in MSPs for farmers, the farm loan waiver, food security act, slashing of interest rates for farm credit and across-the-board hikes in social-sector expenditures defined this approach.

High, investment-driven growth is likely to continue for at least another two years.” You may have read or seen some of the exposés of China’s ghost cities. On the surface of it, this doesn’t seem like a flawed economic strategy; after all, we do need enhanced investment rates in sectors such as infrastructure to leap forward. But as the economic results of such an approach are unfolding, it is becoming clear that while the focus on spurring investment rates may be correct, taking domestic consumption growth for granted is proving counterproductive. Every week we see a new factory output statistic or Purchasing Managers Index that tells us the slowdown might be more of the hard variety than the soft. Similarly, the latest data from the Labour Bureau shows that rural wages have registered an average annual growth of 3.8 per cent this year, the lowest since July 2005.

Simply put, the reason the “takeoff” rhetoric is not translating into reality is because the government’s rightwing economic plan has left less in the hands of people who are, as a result, not spending enough. It is among the world’s most efficient producers in each commodity class, which means that most competing mines will be bleeding red ink while South 32 remains profitable. We expect things to remain ugly for a few years yet, but I find it hard to envisage a world where these assets produce such lowly returns over the long term.

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