Monday 27 October 2014

China's 3Q GDP - Nominal Conclusions

One popular reaction to China’s quarterly GDP announcements is simple disbelief: no statistical agency can hope to estimate quarterly GDP so quickly with any accuracy, so they must just be making it up. My approach is to acknowledge that China’s statisticians face a task which is not only logistically impossible, but also conceptually very difficult (because China is changing so quickly). Nevertheless, through herculean efforts and heroic assumptions, they produce a set of figures which need not simply be written off, but rather interrogated for what they might tell us about China’s trajectory.

The least-useful series is the one that generates the headlines: I have never managed to find any combination of reported monthly economic data -  demand or supply - that bears any statistically interesting relationship to the series of real GDP growth which in 3Q produced a growth rate of 7.3% yoy.  All one can say is that theheadline 7.3% yoy growth in real GDP continued the sequential slowdown vs trend which has been uninterrupted (except in 4Q) since 2010.  Officials seem resigned to a further slowdown in yoy terms in 4Q: if this happens it will represent a further genuine loss of momentum slowdown. If momentum stabilizes, however, we can expect a modest rebound in the yoy rate in 4Q - to around 7.5%.

Nominal Conclusions. However, the nominal GDP series is altogether more interesting, and has much to tell us about how China's economy is functioning.  In summary, it tells us is that the headline nominal GDP was boosted considerably by a doubling of the trade surplus and rather less by a modest fiscal relaxation. Private sector nominal domestic GDP growth (ie, excluding the impact of trade and fiscal balances) slowed sharply in yoy terms, but stabilized sequentially. The private sector’s caution, however, resulted in a rise in the private sector savings surplus to around 4.9% of GDP, which suggests the financial system’s underlying cashflows are slightly improved.   Overall the efficiency of finance within China’s economy remains miserable, but has stabilized, and possibly improved slightly.


If the aim of reforms is genuinely to remodel the economy away from investment and net exports, and towards domestic consumption, those reforms are emphatically not yet producing results. If the short-term aim of reforms is to improve capital allocation and drag China away a debt-dependent growth model, it is probably fair to say that 3Q represents a stabilizing first step on a long and difficult road.

Nominal growth slowed to 8.6% yoy in 3Q from 9.1% in 2Q, but in sequential terms this was actually a modest outperformance of historic quarterly patterns. If maintained, it means that the slowdown in yoy rates may well have hit bottom in 3Q, and be in recovery from 4Q.

The impact of trade. However, nominal GDP was propped up substantially by the trade surplus, which rose 108% yoy in Rmb terms during 3Q, and was equivalent to 5.2% of GDP, and added 2.9 percentage points to nominal GDP growth. Excluding the improvement in the trade surplus, domestic nominal GDP grew only 5.8% yoy,  the slowest since 1Q09. If China’s strategy partly involves weaning itself off the export sector, it failed in 3Q.

The impact of fiscal policy. Secondly, nominal GDP growth was also slightly improved by a slight relaxation in fiscal position, with a Rmb276bn deficit in 3Q up 36.7% yoy from 3Q 13, and equivalent to 1.8% of GDP (vs 1.5% of GDP in 3Q).  On a 12m basis, the deficit is running at 2.4% of GDP, up from 1.5% during the 12m to 3Q13, but the 12m total reflects, as it always does in China, the dominating fourth quarter deficit.   Still, subtracting the impact of the fiscal deficit from nominal domestic GDP leaves a private sector domestic demand growth rate of only 5.3% yoy, down from 5.9% in 2Q, and cutting the 12m to just 7.3%.   However, even after all these subtractions, it remains the case that sequential growth in this figure was slightly faster than historic seasonal trends, and that the fall in the 3Q yoy reflects the sequential slowdowns of 4Q13 to 2Q14, not the underlying dynamic of 3Q.

The impact of private savings/investment decisions.  Meanwhile, the private sector’s underlying economic caution continues to grow, with the estimated private sector savings surplus more than doubling in 3Q to around Rmb 960bn (vs Rmb 469bn in 3Q13), equivalent to 6.3% of GDP. This highly seasonal number is up from 3.4% in 3Q13, and pushes the 12m to 4.9% of GDP (vs 3.5% in the same period last year).  Whilst the rise in private sector savings surplus depresses growth, as it shows the private sector consuming and investing a smaller proportion of its income than at any time since 2010, it has the benefit that it alleviates underlying cashflow pressure in the financial system: the private sector savings surplus, after all, measure the net flow of cash from the private sector to the financial system.  


The impact of finance. Third, with M2 growth slowing to 12.6% yoy in 3Q, whilst nominal GDP growth slowed only to 8.6%, it is just possible that the collapse of monetary velocity (GDP / M2) seen in the immediate aftermath of the 2009 credit binge, and subsequently in the post-2011 slowdown, is stabilizing. This observation is tentative, provisional and vulnerable: however, the slight rise in monetary velocity in the 12m to 3Q reverses the (seasonally expected) falls of 1Q14 and 2Q14, and is slightly better than the stabilization normally encountered in 3Q.  Just possibly, the tighter credit environment is resulting in very slightly better credit allocation. However, please note the caveats. 



But if the efficiency of finance is improving, it is doing so only very marginally, and from historically very low levels. One can also track trends in the efficiency of China’s financing by looking at the relationship between marginal additions to bank lending and/or aggregate financing, to marginal GDP gains.  The chart does that, and it shows that over the last 12 months, one extra yuan of bank lending has been associated with 53 fen of nominal GDP, whilst one extra yuan of aggregate financing has been associated with 31 fen of extra nominal GDP.  In the case of bank lending, this relationship has been effectively unchanged since mid-2013, and whilst it shows an improvement from the credit-binge of early 2009, it remains substantially lower than the levels achieved in 2011-2012, and approximately only half pre-crisis levels.  The crackdown in aggregate financing has resulted in a slightly better story: the 31 fen level is up from 25 fen at the beginning of 2012, but, as with bank debt, if remains at a painfully low level, and less than half the normal pre-crisis levels.  



No comments:

Post a Comment