Monday, January 26, 2009 0 comments ++[ CLICK TO COMMENT ]++

Chinese economic statistics over the last 8 years

Happy Chinese New Year to all! The astrologers, in true fashion of hedging their bets and proclaiming some vague results--kind of reminds me of Wall Street portfolio strategists :)--are expecting a rough year. One unskilled in astrology might be forgiven for thinking that the ox--this is the year of the ox by the way--is somehow related to a bull and hence portends to a bull market. Apparently not. At least that's how I'm reading the situation. I should note that I'm neither an astrologer nor a very good investor so take that for what it's worth ;)...

So, let's check out some Chinese statistics as a New Year arrives in China...

China is potentially one of the top stories of the year. One can argue it was already the story in the last decade but a lot of that was hype and obscured by the bull market in, practically, every single asset--except US$ and Yen, of course. The real story is if it can survive a severe world recession without an implosion of the political system. Let's take a look at how some key ecoomic statistics look, compared to the past 8 years. I am reproducing some charts from an HSBC report below (source: China Economic Spotlight: Not all gloomy, by Hu Hongbin and Ma Xiaoping. January 22, 2009. HSBC)

For what it's worth, the HSBC economists think China will bounce back in the second half of this year. As is the case with the consensus view in America, the thinking is based on the view that the government stimulus will prevent any major collapse. I, however, am more bearish and am far more cautious. I think my negativity is not necessarily based on economic numbers but is, instead, driving by my concern for the political system. A lot of economists and investors only put passing effort into considering political events but I believe they are a big part during economic slowdowns.

(For those not familiar, IP stands for industrial production, RMB is renmembi, and FAI is fixed asset investment.)

GDP & Electricity Production

Chinese GDP numbers are likely manipulated heavily by the government (as is the norm in most totalitarian countries.) It also likely under-represents rural areas. I have no proof of this but am just guessing based on the view that developing countries don't spend the same resources as developed countries. For example, I'm sure the census in China is far less accurate than in Canada or USA. In any case, as long as the government manipulates the numbers in a consistent manner, they can be a rough guide.

Chinese GDP numbers are based on year-over-year numbers, whereas it's mostly annualized quarter-over-quarter numbers in America and most other places, so the drop-off is far worse than it seems. There was essentially zero growth in the 4th quarter, compared to 3rd quarter. One needs to wait and see how 1st quarter numbers shape up. In the US, the first quarter is starting off to a rough start with massive job cuts, annoucements of huge profit declines (this may reflect what happened in 4Q but I suspect management actually looks forward to 1Q and 2Q), and continuous losses from financial institutions (latest was American Express, which reported steep decline in profit due to high losses on credit card loans, although the number was close to consensus estimate.) If you assume that one well-paying job loss results in 2 or 3 indirect job losses, which are almost always not covered by the media, then you can see how much consumption can drop off as the year progresses. China is not driven by the consumer as America and most of the developed world is. But, nevertheless, its economy can continue to deteriorate.

The Chinese GDP growth rate is also close to the widely estimated figure of 7% needed to minimize unrest. I personally don't believe in that number but if things continue to deteriorate, political problems will arise. We already have some protests and riots in some European countries--such as Greece--and China is far more vulnerable. Totalitarian systems are efficient and seem great when things are going well. But they can undergo an epic collapse when the situation deteriorates. For instance, if the economy deteriorates further or if some adverse outcome occurs (say China loses a huge chunk of its reserves due to US$ decline,) then the population will blame the government. To make matters worse, the population will blame the government even if it's not the government's fault. In a more democratic government, population blames the government as well, but everyone knows that they voted for the politicians. So everyone feels somewhat like it's their fault. It is more likely that the party in power is thrown out or some policy is changed, rather than the whole political apparatus being called into question. In contrast, Chinese may call the whole system into question. I am not a fan of totalitarian systems and would like to see them switch but it is more preferable to do that in a slow manner than in the thick of an economic collapse.

Some rely on electricity production--electricity is heavily used by industries--as a better measure of economic activity in China. The GDP can be manipulated more easily than the electricity numbers. I think the industrial production also a good indicator of economic activity. Both IP and electricity production have completely collapsed. Given the steep decline, these measures may have hit a bottom. The question is how long it will take them to recover.

Exports/Imports & Loan Growth

Nothing surprising with imports/exports, with both of them collapsing in the latter part of the year. It should be noted that imports have collapsed more than exports so China actually "benefitted" somewhat from this deterioration. This means, so far, that the cost is being borne by what China imports: commodities and semi-finished products. Commodity exporting countries, such as Brazil and Australia, have taken huge hits; so have the semi-finished-product exporters, such as Thailand, Indonesia, Korea, etc.

The HSBC analysts cite the loan growth as a positive sign in China. IANAE and am not clear on how significant this is.

Fixed Assets & CPI

China is trying to keep the economy humming along by maintaing high fixed asset investment (this would include things like shopping malls, roads, railroads, factories, water treatment plants, etc.) Contrary to the opinion of some, I am of the opinion that fixed asset infrastructure, which is a big portion of FAI, in China is in a bubble. I have quoted, on and off, some stories in the past about brand-new shopping malls being empty or real estate being unaffordable. But if China wanted to keep economic growth going, spending on fixed assets may be ok. It's really a waste of money but it prevents a collapse of society.

The first chart also shows that real estate has clearly entered a correction. I would guess that this may the start of a long correction in real estate, similar to the stock market in China (do keep in mind that the stock market in China is nothing like developed country stock markets, and is more akin to a casino like the US stock market in the 1800's, with rumours driving prices and insider trading being rampant.) My impression, from what little I know of China, is that real estate is likely in a bubble in the coastal urban cities, but is not in a bubble in the interior. So, when I say Chinese real estate has entered a correction, I am primarily referring to coastal areas (I suspect most economic measures capture the coastal areas more than the interior.)

As far as inflation is concerned, the CPI and PPI numbers have fallen off a cliff. Some inflationists seem to think that China will see high inflation in the future but that seems unlikely--unless the government devalues the currency far more than needed. From my understanding of China, it has faced bouts of mild deflation all throughout the 80's and 90's. You can sort of see this in the chart with negative CPI in the late 90's and even early 2000's. My guess is that the mild deflation faced by China in the 80's and 90's is of the "good deflation" type. Namely, deflation due to productivity gains. Although it's too early to say for sure, the current deflation is likely the "bad deflation" which arises due to collapse in demand (or overcapacity if you want to think in terms of production.)

Anyway that's a quick look at some key economic numbers from China over the last decade or so. Hope it was useful to some of you...


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