The recent economic data coming out of China for the first quarter put growth at a resilient 7%. The figures released in March were down on the high of 12% we saw in 2010. But that was to be expected. Everyone is aware by now that growth rates of 10% and over are an unreasonable expectation. It could even be said that China has done well to maintain growth at 7-8% since 2012, especially compared to the dismal rates across the rest of the world.
But the figures may suggest that the 7% growth rate in the first quarter up to March is both optimistic, and wrong.
Macroeconomic think tanks and banks think the real figure is far below that. Lombard Street, a researcher, put the growth rate for the first quarter at a meagre 3.8%. That’s also more in line with Citibank’s (Citigroup [NYSE:C]) estimations, whose own data points to real GDP growth of 4.6%.
The reason why China’s economy may never recover
China has steadily been moving its economy towards consumer driven growth. For years the Middle Kingdom has relied on cheap labour from the countryside to swell the number of workers in factories around the industrialised east coast.
But China’s demographic problem has made this unsustainable. It has the symptoms affecting most developed nations. The country is getting older, and their fertility rate remains below replacement level.
All that means is that China’s access to cheap labour is dwindling. Workers can now demand better wages, leading to rising costs. And now multinational companies are casting their eye on other developing nations in the region to lower expenses. None of this is good news for a nation whose growth has relied so heavily on exports.
The hollowing out of China’s demographic base means there’ll be less young people to consume in the decades ahead. That leads me to believe that their transition to a consumer driven society is going to face difficulties. And it raises questions over its long term ability to keep even ‘official’ growth above 5%.
Why economists are right to question China’s official figures
The underlying concern over China’s slowdown could be worse than many think.
Questions over the consistency of the data are what concern economists so much. Industrial production grew by 5.6% year on year in March. That’s the lowest level since 2008. Industrial production simply calculates the amount of goods that were produced in the country. The reason why economists point to it when measuring GDP is because industrial production is an indicator of real GDP growth. A difference of 1.5% between the GDP rate and industrial production is too high for many economists. And they think the true GDP growth rate is lower because of this.
As industrial production falls, the demand for labour in key exporting industries will follow suit. It’s going to make it difficult for China to transition to a consumer driven economy if the unemployment rates skyrocket.
Another ill-advised response from the Chinese government to address its economic slump has been to clamp down on pollution. It’ll be a political victory, but it will only hurt industrial production capacity in the near term. To make things worse, year on year imports fell by 12.3% in March. And even more worrying was the 14.6% drop in year on year exports. According to independent economists, none of these figures add up to suggest real GDP growth of 7%.
Rail freight volume is the lowest in a decade
China’s rail freight volume is also at the lowest level going back 10 years. It fell by a staggering 15% year on year. That’s even worse compared to the 10% drop during the height of the global financial crisis.
Rail freight volumes are an important indicator because they show that demand for steel has collapsed as the construction boom has slowed. And there’s no doubt over how much it has fallen, because we’ve all been affected by the crash in iron ore prices (currently trading at AU$60).
Why real GDP growth rates suggest that QE is coming to China
Quantitative easing, the antidote for all ailing economies, is probably coming to China very soon. That means more money to inflate the Chinese currency (renminbi) and more opportunities for investors to buy up assets. And it means that China’s inflation rate, which economists believe is higher than 1.5% recorded in March, will go up.
The People’s Bank of China (PBoC) just yesterday discussed the possibility of launching a round of monetary easing in China. That should send the Shanghai Stock Exchange through the roof in the next few years. If China’s GDP growth rates are closer to 5% than to the official 7% rate, then it becomes almost certain that the PBoC will launch quantative easing soon.
If the latest rumours about quantative easing are true, it will create new opportunities for investors buying into Chinese companies. Markets and Money’s contributing editor, Phillip J. Anderson, has been warning for years that official mainstream economic data for China is wrong. But he can show you how to profit from their ignorance, and why now is the right time to invest in China.
Contributor, Markets and Money