Making Sense Of China’s Numbers
With most of the world’s major economies still sputtering, there isn’t a day that goes by that economic and business commentators don’t bring up China, and the fact that the biggest, fastest-growing economy in the world is slowing, and dampening the growth prospects for the global economy in the process. If that’s not bad enough, many suggest that China is slowing even faster than the official numbers for Gross Domestic Product (GDP) suggest.
The government has said that China’s GDP grew by 10.4 percent in 2010; 9.2 percent in 2011; and 7.6 percent in the second quarter of 2012. The slowdown is obvious. However, many China watchers point to weak global commodity prices, the slow growth in power consumption, and a host of other factors as evidence that China’s economy is growing at a substantially lower rate. Either the government is cooking the books, or something else is going on?
I’ve never believed in conspiracy theories, and it seems unlikely that there is a conspiracy in China to try and mislead its people and the rest of the world. China’s economy is much too large and complicated these days to think that any group of statisticians could change all the numbers that would need to be changed to convey a false reality — and then keep them all straight so that a new round of numbers could be manufactured the next month. Potemkin villages may have been possible in the days of Mao Zedong, but with the Internet and the developments in social media, it’s hard to imagine how any material distortionswould go unnoticed for very long today.
I tend to think that there is another factor at work, which is that the Chinese economy is transitioning away from one that is dominated by heavy industry and infrastructure spending to one where light manufacturing, services and domestic consumption are the key drivers. Between 2005 and 2008, for example, infrastructure spending in China expanded at an annual clip of 21 percent. After declining to virtually zero by the end of last year, infrastructure spending is only growing at a little over 12 percent today. That and other factors may help explain why there is a seeming disconnect between commodity prices and many industrial production statistics, on the one hand, and the numbers for the growth of the economy as a whole on the other.
China’s motor vehicle industry is a case in point. Unit sales of passenger cars, the ultimate consumer purchase, are up by 9 percent year to date in 2012, with luxury cars posting even faster growth. Meanwhile, full-year sales of heavy-duty trucks, which are driven principally by industrial production, construction and infrastructure spending, are only expected to reach 700,000 to 750,000 units this year, down 15 percent to 20 percent from 2011. The growth momentum of the heavy-duty truck sector has been declining since 2010 when China surpassed the million-vehicle mark in terms of heavy duty truck sales. Obviously, a maker of passenger cars might be inclined to agree that growth is slowing in China, but that 7.6 percent GDP growth is not out of line with car sales. A maker of heavy duty trucks, on the other hand, might come to a completely different conclusion about the state of the Chinese economy.
In fact, many other statistics support the transition of China’s economy to services and domestic consumption. The National Bureau of Statistics (NBS) collects data from more than 100,000 shops all across the country, and it recently reported that retail sales are up 11.4 percent so far in 2012, compared to 11.3 percent in 2011.
Moreover, retail sales have been up by more than 12 percent in each of the last three months, supporting the belief that China’s economy may be stronger in the second half of the year than it was in the first. On the housing front, home sales increased by 18.8 percent in August, further indicating that consumption — and the consumer— are alive and well in China.
A private study just released today by HSBC and Markit Economics said that China’s service industries expanded at a faster pace in September as output increased by the most since May. According to the study,the purchasing managers’ index rose to 54.3 from 52 in August, and new order volumes at services companies rose at the fastest pace in four months. A reading above 50 indicates expansion. Today’s report suggests that China’s slowdown is stabilizing after the economy’s weakest expansion in three years in the second quarter.
In addition to varying rates of growth in specific industrysectors, it’s also important to understand that consumption is spreading across China into the country’s populous rural areas. Approximately one-half of China’s people now live in cities, while the balance of the population lives in the rural areas. Over 90 percent of China’s urban population live in Tier 2 and Tier 3 cities, though, which is why it is important to look beyond what is happening in Beijing, Shanghai and Shenzhen to truly understand what is happening in the country as a whole.
Over the past 10 years, incomes in urban areas increased by 151 percent, while those in rural areas lagged, only growing by 111 percent. That trend is now reversing. In 2012, rural incomes have grown by 12.4 percent, while those in urban areas have only grown by 9.7 percent. That is one of the reasons why household spending in China’s countryside is up 12.9 percent this year, compared to 8.4 percent in the urban areas.
There is no question that China’s growth is slowing, but the country’s economy is also in transition. In addition to the major industry sector shifts that are underway, there is also a geographical shift that is changing consumption patterns in the country. Savvy retailers have already discovered this trend and have begun focusing their future expansion in China’s lesser known cities.
More than ever, it is dangerous to generalize about an economy as large, as diverse, as complex and as fast changing as China’s.