How Real is China’s Renewed Boom?

The numbers smell cooked, says a respected economist

How reliable are China's growth figures, and is the world's second largest economy really powering out to lead the OECD back to health? How did the country manage to hit its benchmark GDP growth of 7.8 percent last year, when so many signs point against it?

China's official figures have been under considerable fire virtually since the government started publishing them, to the point where most analysts use them only as a description of trends rather than as actual measures. This year, however, with the global economy in the doldrums, the investment banking community has seized on them with enthusiasm.

There is a certain amount of controversy, for instance, over the difference between official figures and the HSBC China Service Production Manufacturer's Index compiled by Markit Economics, which slowed to 51.7 percent in December. Unlike any prior year, the full-year Markit 2012 average PMI actually fell below the 50 expansion/contraction line. The official version of the manufacturing PMI, however, showed a dip to a still-positive 50.4 percent, suggesting only that manufacturers might be taking a break ahead of the Chunyun spring festival.

However, an ominous harbingers came on Feb. 6 when Cummins Inc., one of the world's biggest suppliers of industrial engines, delivered its fourth-quarter 2012 earnings report, during which the chairman and CEO, Tom Linebarger, gave a detailed rundown of the company's business activities in the previous quarter and for2012 generally that indicated Cummins' growth, a backbone of Chinese industry, was nowhere near 7.8 percent. He also commented on the outlook for 2013.

In fact Cummins' full-year China revenues fell by 20 percent annually, Linebarger told investors. The Chinese construction industry, he said, continued to experience weak demand for new excavators through the end of 2012, with fourth quarter sales down 25 percent. Full-year industry sales declined by 35 percent.

"A significant overhang of inventory remains, both in distribution channels and at OEMs that will dampen new equipment production in 2013 even after the markets begin to recover," Linebarger said, adding that the combined market for medium and heavy-duty trucks declined by 21 percent in 2012 as the slowing economy needed fewer trucks. The market size for heavy- and medium-duty trucks in China in 2013 probably will be similar to2012 levels.

Cummins could conceivably be experiencing a precipitate loss of market share, or the needs of the construction industry are veering away from the purchase of international equipment.The China bulls say things are good and getting better. But it seems to depend on whose statistics you use.

Dr Jim Walker, the president and chief economist of the Hong Kong-based Asianomics financial advisory firm, is among the China bears. In a Feb. 6 report, he points out that electricity production is a reasonable indicator of overall activity in the Chinese economy. It shows that 2012 had the slowest-growth of the past six years at 4.1 percent annually. Even in recession-hit 2008 and 2009, electricity output growth was 25 percent and 63 percent, respectively.

Government revenues available for calendar years from 2009 onwards and the three years' worth of growth rates resulting show a nominal economy slowing significantly.

Corporate results and cash flows for half and three-quarters 2012 results for all of the listed companies in a non-financial US$500million minimum market capitalization sample show a weakening economy, with corporate earnings faltering as badly as at the height of the Global Financial Crisis, Walker points out.

The assembled date, Walker says, indicate that 2012 was significantly weaker than either 2008 or 2009, even though the official GDP numbers show only a marginal tapering off.

"Demand in the real economy was as weak as the picture painted by our PMI and electricity production indicators," Walker writes. "Tax receipts and corporate earnings, not to mention what we know of cash flows in the first half of last year, also indicate the slowest economy in the last half decade, and not by a marginal amount."

Most of these figures show that the boom most China Bulls discovered in the second half of 2012, and the fourth quarter in particular, isn't there.

"This makes us suspect that large amounts of the credit expansion - and there certainly was some relief on this front - have found their ways into capital outflow and property speculation rather than real economic activity," Walker continues. "The same might also be true of local government infrastructure projects. So did China grow at 7.8 percent in real terms in 2012? We doubt it. Judging from the aggregation of our indicators and attempting some calibration from the past - always assuming that the pattern of growth in GDP is at least reflected in the officially reported numbers - we would guess that China grew by no more than 5 percent last year.

Leading where?

So where does China lead the world in 2013? "We are in no doubt that some easing did take place in the fourth quarter of 2012 but we suspect that it has run into trouble already (activity being rekindled in the wrong areas, capital escaping at an even faster rate and prices responding more to the easier credit than the real, productive economy).

"Moreover, we doubt that companies which have suffered payments delays from the usual suspects - local governments, infrastructure projects - are in much better shape today than they were six months ago. That means, in order to rebuild balance sheets, capital expenditure will have to be cut."

Walker, holding out against a tide of optimism, believes the signals are for a slower Chinese economy rather than an accelerating one. He expects growth in the range of 0 to 4 percent for 2013. But even if that is the real picture, don't look for it in official figures.

Asia Sentinel suspects that the official 2013 growth figure will come in somewhere around 8 percent. Check back in January 2014.

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