Contextualizing China’s 3Q GDP Print
This we know: Chinese economic data is, at best, massaged and, at worst, fabricated (as confirmed by Chinese Premier Li Keqiang years ago). In fact, we’d argue Chinese economic data is probably about as massaged as any pre-election Jobs Report is likely to be in the US!
Still, in the context of our process of focusing primarily on slopes, inflections and deltas when analyzing economic data, we are more than happy to compare any data point to the previous data point(s), so long as the data series itself is methodologically consistent.
In that light, it doesn’t matter to us if China’s “actual” real GDP growth is +7.3% YoY (NBS for 3Q14) or the +3.9% forecasted by the Conference Board’s 2020-2025 Chinese growth outlook. All we care about is any directional deviation from trend – which is what actually matters to investors, per the preponderance of Dr. Daniel Kahneman’s work in the field of behavioral economics (e.g. anchoring, prospect theory, etc.).
From that perspective, China’s 3Q14 real GDP growth rate of +7.3% is:
- The slowest rate of change since 1Q09;
- Is -1.1 standard deviations from its trailing 3Y average; and
- Is in the 5th percentile of readings on a trailing 10Y basis.
4Q Looks Dour as Well
From a forward-looking perspective, a marginally difficult base effect, slowing sequential momentum and seasonality are all supportive of continued trend-based slowing in the preponderance of China’s reported growth data here in 4Q – whatever underlying unit demand may be.
Diving deeper into the aforementioned point regarding slowing sequential momentum, our analysis of the data shows a Chinese economy continuing to lose steam without a meaningful enough change in either monetary or fiscal policy to support any semblance of a sustained inflection (i.e. 2-3 months or more).
- As of mid-OCT, the 2M moving average of the arithmetic mean of the YoY % change in monthly average iron ore, rebar and coal prices – our favorite real-time indicator for the slope of Chinese growth – continues to crash on a YoY basis and is decelerating versus its trailing 3M, 6M and 12M trends.
- As of SEP, China’s headline PMI data and each of its 10 sub-indices are decelerating versus their respective trailing 3M trends. China’s trade balance tells a similar tale; it too is decelerating both sequentially and versus its trailing 3M and 6M trends.
- As of SEP, various measures of “hot money” capital flows are decelerating both sequentially and versus their respective trailing 3M, 6M and 12M trends.
- The NBS’s Business Cycle Signal Index, Coincident Economic Indicator, Consumer Confidence Index and Leading Economic Indicator each decelerated sequentially in SEP.
- As of SEP, growth in retail sales has decelerated both sequentially and versus its trailing 3M, 6M and 12M trends. This is especially troubling considering the fact that household consumption has overtaken investment amid structural rebalancing efforts (“C” = 48.5% of GDP in the YTD vs. 41.5% for “I”).
- In the YTD through SEP, growth in fixed assets investment decelerated both sequentially and versus its trailing 3M, 6M and 12M trends.
- On the positive side of the ledger, growth in exports, FDI, imports, industrial production and total social financing has accelerated both sequentially (in SEP) and versus their respective trailing 3M trends.
Looking to the Chinese property market – which accounts for ~15% of Chinese GDP directly and materially affects some 40 industries – our analysis shows continues weakness there as well:
- As of SEP, growth in the availability of funding in the real estate sector decelerated both sequentially and versus its trailing 3M, 6M and 12M trends.
- As of SEP, growth in both the nominal value and square footage of property purchases decelerated sequentially and versus their respective trailing 3M, 6M and 12M trends.
- Contrast this with growth in both starts and completions having accelerated sequentially in SEP and versus their respective trailing 3M and 6M trends, and it’s easy to assume a dour outlook for Chinese property prices.
- Speaking of, growth in Chinese property prices across all tiers of cites decelerated both sequentially in AUG and versus their respective trailing 3M, 6M and 12M trends. Data from the China Real Estate Index System confirms a continued slowdown in SEP where average home prices across the 100 largest cities decelerated to +1.2% YoY from a gain of +3.2% in AUG. The -0.9% MoM decline recorded in SEP ‘14 is the steepest drop since the survey began back in 2010.
- All of this rhymes with the latest Real Estate Climate Index reading of 94.8 in AUG, which represented a deceleration from both a sequential perspective and versus its trailing 3M, 6M and 12M trends.
Again, it’s important to note that our daily analysis of official rhetoric via mainland press continues to suggest that no major stimulus initiatives are coming down the pike. Mortgage policy continues to ease, at the margins, but not in a material enough way to inflect the broader growth outlook; oversupply, rather than a lack of demand, is actually the key issue facing China’s housing market going forward.
For an even deeper dive into China’s Growth/Inflation/Policy outlook, please review our 9/30 note titled, “DEFCON 2.5: THE “CHINA OVERHANG” IS LIKELY TO CONTINUE”.
All told, the inclusion of today’s growth data and its associated policy rhetoric (the NBS actually talked up the 3Q GDP figure, saying it fell within their so-called “reasonable range”) is just more of the same as Chinese policymakers attempt to gradually walk the mainland economy “down the ledge” of overcapacity and systemic indebtedness, as opposed to allowing it to “fall off a cliff”.
It’s worth noting that our views on the Chinese economy and the policy that drives it haven’t changed all that much since we correctly forecasted the aforementioned approach over three years ago. As such, we continue to think that estimates of marginal Chinese demand should continue to decline for the foreseeable future.
With #ChinaSlowing (15% of marginal global demand in 2013), #JapanSlowing (5% of marginal global demand in 2013), #EuropeSlowing (18% of marginal global demand in 2013), and #USSlowing (17% of marginal global demand in 2013) all at once, what could possibly go wrong?
Associate: Macro Team