By John Richardson
WE all should know that China’s published GDP figures are meaningless as, of course, China’s premier Li Keqiang has told us so.
But the trouble is that so many analysts continue to talk about another burst of stimulus being just around the corner, which will help China achieve its 2014 GDP growth target of 7.5%.
Those familiar with the blog will know that we have long argued that such a burst of stimulus would be nothing short of an economic, social, political and environmental disaster for China . The great news is that it is not going to happen because China’s leaders are not stupid – they know it would be a disaster.
And back to our main point: Even if there is an uptick in official GDP growth later this year, for whatever reason, this would likely be a public relations measure and the data would, essentially, be meaningless.
The chart below, from veteran China commentator and metals expert Simon Hunt, illustrates our point.
It begins in 1991 and shows nominal GDP (dotted blue line) and a GDP deflator (red).
Nominal GDP is total output before adjusting for inflation, and the GDP deflator then adjusts for inflation.
The black line shows official GDP growth and the green line is real GDP growth, once this deflator has become taken into account.
The real GDP line shows that China saw negative GDP growth in 1993, 1998-1999 (the Asian Financial Crisis) and 2009 (the Global Financial Crisis).
We think that real GDP growth is again likely to dip into negative territory as the vital economic reforms accelerate.
On this occasion, though, negative GDP growth is a much bigger deal for the global economy. Here is why, based on data from the UK’s Guardian newspaper:
- Before 2007, the US was easily the biggest contributor to the growth of the world’s economy. In 2004, for example, the world economy grew by 12.8% (nominal terms) to which the US contributed two percentage points. By way of context, the UK and Japan that year contributed 0.9 percentage points, France 0.7 and Germany 0.8. China also contributed 0.8 percentage points.
- In 2007, the world’s GDP grew by a similar 12.7%, but this time China was the biggest contributor with 1.6 percentage points worth, and the US contributing just 1.2. And since then, China has remained the biggest driver of the world’s economic growth.
- To put it in even more stark terms, from 2007 to 2013, the world’s economy grew by 31% and China contributed nearly a third of that, with 10.1 percentage points worth.
And so, as official GDP growth rates are worthless, what can we rely on as a guide to what is actually happening in China’s economy?
We could recalculate nominal GDP growth based on an inflation adjustor. But as inflation is constantly shifting, we would have to wait until the end of this year to work out 2014’s real GDP growth.
This would obviously far too late for corporate planners.
The fantastic news for company planners in every industrial sector is that chemicals serve as an excellent “real time” barometer of what it is really happening out there. This is because our industry supplies the raw materials for so many consumer goods.
The chart below, showing China’s purified terephthalic acid (PTA) operating rates, is therefore very useful.
It shows that in 1998, China’s average PTA operating rate was 81%. This was the lowest point of the Asian Financial Crisis when, as we point out above, China’s real GDP was in negative territory.
Last year, the rate fell to 80%. This was not only lower than during the Asian Financial Crisis, but the lowest operating rate since at least 1995.
And the estimated operating for this year is just 64%. But with rates right now at 52-53%, there is a danger that the average full-year rate might be even lower than this.
This could well mean that:
- China’s economy is in its worst shape in at least 19 years.
- This is occurring at a time when China’s economy is much more important for global economic health.
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