China’s official third quarter GDP growth number was released on Monday, coming in slightly light at 6.9% rather than the government’s projected 7%.
The headline 6.9% number itself is kind of ‘whatever’ at this point.
What really matters is that there are two components of the number that really make no sense. The two components relate to consumption and services.
Both are vital to the China’s transition story – to the idea that it is making meaningful progress in its move from a investment driven economy to one based on consumption.
The signal in the noise
Saying that there are two components of GDP growth that seem more questionable than others is, at this point, is saying a lot.
Over 2015, China’s GDP growth has become one of the most discredited numbers in global finance. The country’s own government has highlighted weaknesses in the number, with Premier Li Keqiang recommending other, better measures of Chinese growth, like electricity output.
Casting even more doubt on the number, though, is its consistent nature -7% over the first two quarters of 2015 – in spite of the economy’s marked slow down. That is what has really made investors skeptical.
However, it remains important because inconsistencies in the data do provide some signal in the noise.
So we dive.
Consumption and services
To nail a smooth economic transition, China has to grow its services and consumption sectors at a steady clip to make up for declining sectors like property and manufacturing.
This quarter the official growth number for China’s services sector came in at 8.6%, up from 8.5% a quarter before. The problem here is the fact that the financial sector is included in that number. In the first half of the year it grew at 17.4%.
“By our calculations, if financial sector output had held steady at 10.2 percent year-on-year growth — the level in 2014 – GDP growth in the first half of 2015 would have been just 6.5 percent,” wrote Bloomberg economist Tom Orlik after the 1H 2015 growth number was released.
Now, you’ll recall the sector had a fairly nasty third quarter as the stock market crashed in August.
The government reacted with IPO cancellations, short selling bans and government investigations, which tend to put a damper on things.
That is sitting inside the services sector. Right now, though, it seems unaccounted for.
As for consumption, its contribution to GDP actually decreased in Q3 from 4.2% to 4%.
“This looks a little odd,” wrote Societe Generale analyst Wei Yao.
Why? Because the underlying data in that number actually came in pretty strong. Retail sales grew from 10.2% at this time last year to 10.7%.
On the government side, fiscal spending increased by a wide margin from 14.9% at this time last year, to 25.8% this quarter.
So we don’t really know what the deal is here either. We just know what the government wants to project, which is a transition period in these sectors.
Oh and by the way, nominal GDP growth
There’s one more thing to think about when it comes to China’s GDP growth number in its entirety. While the headline growth number came in at 6.9%, nominal GDP came in at 6.2% – the lowest rate since 1999.
Alex Frangos of the WSJ nailed why this nominal growth number is a problem.
“That is distressing news for anyone in China with a lot of debt, as slow nominal growth makes paying off loans more difficult. With credit still expanding double digits, deleveraging writ large remains a far off dream,” he said.
Just in case you weren’t already confused, go ahead and add that to the mix.
- Morgan Stanley