China Growth Not All What it Appears to Be

Despite our post earlier today covering the across the board price increases for a full range of metals in China, not all of the macroeconomic signals coming out of China suggest a rebound in local demand means the Chinese economy overall is Ëœleading the world out of its slump.’ Nor does it appear to be firmly on a sustainable growth path (defined as 8% or greater). In fact, there are several trends that look just plain downright scary.   Richard Brubaker over at All Roads Lead to China recently covered a UBS call on the topic of whether or not China has lost control. Richard sites four opening remarks made by UBS as follows:

  1. Growth is more broad-based than many investors realize.
  2. Current trends are unsustainable if they continue unabated.
  3. But we now see the policy mix changing.
  4. As a result, look for a more sustainable 8% to 8.5% growth.

Richard’s position on the first point, and while I would agree that growth has been more broad based than many think, it is also certainly not growing in many areas that many were looking for broad based growth as well (domestic consumption being one of them).   He goes on to say that he agrees with points two and three and four is too early to tell.

We would agree with Richard on all 4 points. Consider the fact that a strange dichotomy exists between industrial value-added (a measure of output) and electricity usage. Industry value-added increased 7% during the first six months of the year while electricity usage fell 2.24%, according to a Reuters article picked up by Forbes. The article goes on by saying that the discrepancy could be due to the fact that industry value-added only tracks larger state owned firms (who appear to be driving the growth) and not smaller firms (which some say have been hurt more by the downturn). Some now feel that the decline in electricity usage (of 48.9%) since the beginning of the year had to do with the demand drop-off for small firms. The article also notes that smaller firms drive employment numbers, much more so than the larger state owned firms.

Other data also suggest some disturbing trends. For example, consumer confidence has dropped to a level not seen since 1999, according to the Forbes article. The Financial Times also recently reported the discrepancy between growth figures coming from Beijing vs. the provincial government heads (provincial government leaders tend to overstate growth as it helps their careers, according to the article). Thus a 10% gap exists between local governments’ statements of GDP and Beijing’s. Another area of great concern relates to a potential real estate bubble. According to an article that Richard linked to, investors are rushing to big cities to get into the housing market, possibly portending approaching inflation. Loose monetary policy could be the root cause and as we have been reporting, China has been on a lending boom, much of it perhaps housing related.

The numbers that will drive China’s growth will require a rebound in domestic demand. Rising metals markets could indicate such a trend. But one thing is for certain, anybody looking to capitalize on such a trend ought to seek multiple data sources because the picture we see appears quite distorted.

–Lisa Reisman

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