The Chinese economy: what the recent economic data means for the market
GDP is an important barometer of the overall economic health of the Chinese economy. On Monday the NBSC (National Bureau of Statistics of China) revealed a year-on-year growth rate in Q3 GDP of 6.9%, beating economists’ expectations of a 6.8% rise but still below the government’s key target of 7%. Combined with weaker industrial production figures, we might expect this target to remain out of reach in 2015.
We can also look at GDP growth from quarter to quarter to get a fuller picture. Since Q2 2014, when a 2.0% gain on the previous quarter was recorded, GDP has struggled to match this growth rate, falling to 1.9% in Q3 2014, 1.5% in Q4 2014 and 1.3% in Q1 2015. This is still growth – GDP is still increasing quarter-on-quarter – but it is growth at a declining rate of expansion. This increases concern at China’s future prospects.
GDP measures the total value of goods and services produced within China in each successive quarter. Since the Chinese economy is the second-largest economy in the world, the figures are extremely important. A slowdown in GDP growth does not bode well for the Chinese economy or for global confidence. Contractions in GDP indicate that production is declining and consumption is declining – either at home or abroad or a combination of both. Given the spectacular equities rout that the Shanghai Composite Index and the Shenzhen Index recently endured, this metric is especially important.
The consensus expectation for Q3 GDP growth, when measured quarter-on-quarter, was 1.7%. Monday’s reading instead came in at 1.8%, indicating a marginal expansion since the turn of the year. But is this enough to allay fears?
What effect will Chinese retail sales have?
As we have recently seen in the US, retail sales can have a dramatic effect on the performance of a country’s currency, global market sentiment and the strength of emerging market currencies too. Since China is the world’s second-largest economy, year-on-year retail sales growth for September is equally crucial. Through early 2015 China posted declining growth rates from 10.7% in February to 10.2% in March to 10.0% in April.
These slowing increases year-on-year are indicative of an economy that is contracting, or otherwise growing significantly less than anticipated. June, July and August reflected the beginnings of a potential uptick in retail sales growth with figures of 10.6%, 10.5% and 10.8% respectively. Unlike GDP, the consensus estimates for retail sales growth were far more mixed: in June the estimate was 10.2% (lower than the actual reading), in July the estimate was 10.6% (higher) and in August the estimate was 10.5% (lower again).
The consensus estimate for year-on-year growth this time around was 10.8% and the actual figure came in at 10.9%. So narrowly beating out expectations, but this is hardly a reason to celebrate.
What about industrial production?
Industrial production is one of the most important barometers of an economy’s health, especially the Chinese economy. China is known as the world’s economic engine, accounting for the vast majority of production. In August 2015 industrial production in China had increased by 6.1% over the same period a year ago. Again the readings have ebbed and flowed through the year, with year-on-year growth being the norm, but at slower rate.
For example, the growth rate in February was 6.8%, while March slumbered at 5.6%, April at 5.9% and May at 6.1%. June rose to 6.8%, while July dropped to 6%. The forecast for September was 6.0%, but the actual figure reported on Monday was sharply lower at 5.7%.
Industrial production is a measure of all production capacity/output of the Chinese industrial sector. This includes utilities, manufacturing and mining. All of this data needs to be viewed in context of overall market sentiment in China. Business confidence was last recorded at 49.80 and manufacturing PMI at 47.20. Any figure below 50 is regarded as contractionary or bearish for the Chinese economy.
Any upticks in retail sales, industrial production and GDP are naturally positive for China. Emerging market countries will be looking hard at the economic data to determine which direction their own economies will now take.
Economic forecasts as a result of China weakness
While China maintains its GDP target of 7%, the OECD forecasts growth of 6.7% in 2016. The decline in expectations is due to lower levels of capital investment in businesses and the slowdown taking place in the real estate market. It should be remembered that fiscal spending on infrastructure development will boost the Chinese economy, but may not offset the negatives. CPI is likely to stay low and PPI negative as a result of overcapacity in several heavy industries across China.
The fact of the matter is that investment in China has been on the decline for several years and it comprises a smaller percentage of GDP than consumption does. This excess capacity that everyone makes reference to in China is indeed becoming problematic for the Chinese economy. The allocation of resources remains a key issue China’s policymakers are attempting to resolve.
The privatisation of state-owned enterprises would be a step in the right direction, in order to bolster productivity and profitability. The Chinese are moving towards a consumer-centric economy with greater emphasis on shifting populations from rural areas to urban areas, and that is part of the strategic vision of the country’s economic plan.
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