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Grim Fairy Tale: China's Economy Grows at 8.1%

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(Image credit: Getty Images via @daylife)

On Friday, Beijing’s National Bureau of Statistics announced that the Chinese economy grew 8.1% last quarter, down from 8.9% in the previous period.  Q1 growth was the lowest in 11 quarters.

On the day before NBS made its announcement, market chatter pegged growth at 9%, spurring rallies.  Yet investors were not the only ones taken by surprise on Friday.  Consensus surveys of analysts forecasted 8.3% to 8.5%.  The 8.1% figure even came in below recent Chinese government estimates.  As late as the third day of this month, Zhang Xiaoqiang, vice chairman of the National Development and Reform Commission, predicted 8.4% growth, citing “initial figures” from “relevant China research institutes.”

But as disappointing as the Q1 number was—and stock markets did not react well to the news—it looks like the 8.1% figure overstates growth, not correlating with the weight of information for the period.

It’s true that the economy improved in March.  Industrial value-added output, for instance, was up 11.9% year-on-year.  There was a big increase in bank lending, which skyrocketed 15.7%.  Exports were stronger than expected, increasing 8.9%, and the trade surplus came in at a robust $5.35 billion.

Nonetheless, the Chinese economy always improves in March, when the drag of the long Lunar New Year holiday wears off.  This year, the “March bounce” was weaker than in prior years.

Take industrial value-added output, for instance.  Last year in the first quarter, it increased at a faster pace—15.7%—than it did this year, when it rose 11.6%.  Even the surprisingly robust semi-official manufacturing purchasing managers’ index, which jumped 2.1 points in March to 53.1, showed a weaker-than-usual rebound.  And it is hard to reconcile either of these Beijing-generated numbers with the widely followed HSBC Markit PMI, which tumbled to 48.3 from 49.6, the fifth-straight month of contraction.  And in a tell-tale sign, producer prices were down last month.

The bank lending number, usually cited by optimistic analysts, is indeed a good signal, especially after the 8.2% drop in new lending for the January-February period.  Yet lending is essentially a leading indicator, so the number for March is not an especially good one for the first quarter.

And the trade surplus number reflects weak imports, a sign of slowing domestic demand.  In March, imports increased by only 5.3%.  Weak commodity imports are troubling indications.  On a month-to-month basis, oil imports in March dropped 5.8%, copper was off 4.6%, and iron ore shipments were down 3.2%.  And were it not for government-directed stockpiling, the import numbers would have been much worse.

So how fast did GDP grow in Q1?  By far, the best indicator of Chinese economic activity is the generation of electricity.  In the January-February period electric output grew by 7.1% year-on-year according to official statistics.  In March, output increased 7.2%, the slowest increase for a non-holiday month in a year.  Because the growth in electricity outpaces the growth of the economy, it’s evident that China cannot be growing faster than 6%.

Actually, a 5% pace is more realistic because other signs point toward flattening growth.  Home and commercial property sales dropped 14.6% in Q1 from the same period last year, for example.  Bellwether passenger car sales for the quarter were down 1.8% year-on-year, and sales of commercial vehicles were off a stunning 10.8%.  The latter figure, usually neglected by the China-watching community, is particularly important as it suggests general business activity will slow in coming months.

Considering everything, it’s extremely unlikely that the economy expanded anywhere near the claimed 8.1% pace.  The momentum at the moment is on the down side, and day after day we are witnessing a dynamic increasingly difficult to reverse.

None of this seems to bother economists and other observers, who by and large are sticking with their growth forecasts for the year.  Take Ting Lu of Bank of America Merrill Lynch.  “The worst is over,” the popular analyst said while defending his prediction of 8.6% growth for this year.  “Most investors will accept that March is the turning point and we are now on the upturn of the cycle.”

Really?  It’s evident from the numbers that the economy is not going to reverse its downward course unless Premier Wen Jiabao acts decisively and acts fast.  The steps that analysts are talking about—principally reductions in the bank reserve-requirement ratio—are clearly insufficient to stop the slide.  They have not had a noticeable effect up to now, so it’s unlikely they will work in the future.

In short, China is not growing at 8.1%, and unless something big is done fast, in months it will not be growing at all.

Follow me on Twitter @GordonGChang