China’s Growth Worse Than You Think

ChinaProvincialGrowth7May2014

 

By John Richardson

HEADLINE growth numbers seemed to be good enough for most China observers at the height of probably the world’s biggest- ever credit boom.

Why? Because you could argue that the flood of credit, and with it investment, was lifting all of China’s economic boats.

No matter that the wrong kind of investment was creating perhaps the world’s worst-ever environmental catastrophe – and that it was also creating major bad debt problems, and, ironically, in what is a Communist country, a sharp increase in income inequality - beyond even US levels. What counted for most people with a short-term perspective was that chemicals demand was booming.

Now that the party is over, headline growth numbers are no longer good enough for any of us. This has been the case since last year, probably earlier than that, when China’s economy began to change. The problem is that many people are only now catching up with economic reality, and so valuable time has been lost.

This FT Beyondbrics blog post supports our argument

It says that:

  • Most affected by the economic slowdown are China’s central provinces, its second and third tier cities and companies related to construction, real estate and heavy industry.
  • Smaller manufacturers and blue collar workers at the lower end of the wage pyramid.
  • Heilongjiang, Hebei and Shanxi  provinces are particularly badly affected. As the map above shows, their GDP growth year-on-year in Q1 fell by three percentage points or more. The reason is that they have been heavily-reliant on investment for growth – and are big in chemicals, petrochemicals, textiles, steel and other “old industries” that no longer fit as easily with where China is heading. These sectors are blighted by oversupply and are thus being starved of credit as China restructures. Manufacturers in these sectors are also facing high environmental compliance costs, as a result of China’s “war on pollution”.

Chemicals manufacturers need to therefore more carefully assess who they sell to – and in which regions of China they should focus their greatest sales efforts.

The extent of the overall slowdown should also not be underestimated.

“Lombard Street Research  thinks Chinese official statistics on prices understate reality,” says the same Beyondbrics blog post.

“They use a weighted average of the changes in CPI (consumer price inflation), fixed asset investment prices and export and import prices to arrive at their own GDP deflator,” adds the post.

“When this GDP deflator is applied to Q1, it suggests that GDP growth fell 0.6% on a quarterly basis in the first quarter and slumped to 4.4% on an annual basis.”

China might, as a result, enter a technical recession in the first half of this year, warns Lombard Street.

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