China’s GDP

6 November 2015

One of the more difficult things to understand is precisely what is going on in the Chinese economy.  How fast are they growing?  What are they focussing on?  What are their plans?

Part of the problem is one of language – and even more critically, culture.  While the most of the (western) developed world has the same cultural underpinnings, China’s is vastly different.  Confucianism and Taoist philosophies lead to different outcomes from those based on Plato and Aristotle! Another problem is the fidelity of data : On 19 October, less than 3 weeks after the end of Q3, China released their GDP numbers – surprising the market by being only 0.1% below their 7% growth target. 

This speed of calculation and the relatively surprising results, along with a history of somewhat “unbelievable” numbers has led to a range of alternative estimates of China’s “real” GDP.  Some of these are based on electricity usage, others on shipping or resource use.  The reason these are important, according to Bloomberg is, "All of the proxies suggest growth in 2015 has been lower than the 6.9 percent reported by the National Bureau of Statistics for the third quarter.  Most show an increasing divergence with the last year or two, suggesting the official numbers may be upward biased during downturns."

Here are 3 estimates :

1.       Barclays

Barclays uses a blend of high-frequency indicators on activity, such as railway freight, official data, and purchasing managers' indexes, which are survey-based metrics.

2.       Nomura

Nomura's proxy for Chinese growth is comprised of nine indicators: money supply, the OECD leading indicator, the spread between three-year and six-month government debt, turnover in the Shanghai stock market, the difference between producers' output and input prices, and the production of steel, cars, chemical fiber, and metal-cutting machinery.

3.       Capital Economics
Capital Economics draws on five indicators to build their proxy for Chinese activity: freight volume, passenger numbers, electricity output, seaport cargo volume, and the area of floor space currently under construction.

Clearly there are a wide range of views, but the general consensus seems to be that China’s real GDP growth rate is substantially lower than reported and that it is despite much stimulus over the past year, not increasing yet. Corporates and sovereigns with a high degree of exposure to the Chinese market cannot expect any outside help – at least not in the short term.