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Zhihao Wang (Stephen Green): Discussion of Chinese Economic Data

Apr 18-2013   



 

The authenticity of the growth rate of Chinese GDP has always been doubted by those on the outside. It is easy to arrive at the conclusion that China has no economy cycle by looking at only the official data because the growth rate of China’s GDP has been a relatively stable time series after the seasonal adjustments. During the Asian Financial Crisis in 1998, China’s growth rate of GDP was at 7.8%. During the American Economic Crisis in 2008, the lowest point of China’s growth rate of GDP remained at 6.1%. During the crises, the Chinese official GDP growth rates did not show significant decrease, while during in China’s rapid economic growth period between 2006 and 2007, the official GDP growth data also failed to show a dramatic increase. These phenomena have caused foreign scholars to believe that Chinese government has purposely lowered the GDP growth rate in its reports in order to the concern from Western countries about the rapid development of Chinese economy. Therefore, it is necessary to monitor economic data from various aspects of the Chinese economy in order to achieve an accurate and comprehensive understanding of the situation.

Power generation is an important indication of China’s GDP. Power generation and industrial added value had not been in synchronization since 2008. After 2011, power generation in China sagged, while industrial added value continued to grow positively. Some scholars had pointed out that in order to carry out the national policy of reducing GDP energy intensity, local government had reduced power generation. Another view states that in order to avoid the limitation on power generation, power companies have been purposely reporting undervalued data.

In comparison with electricity generation, freight traffic (including highway, railway, and water transportation) and diesel oil data are more reliable to indicate China’s GDP growth. Freight traffic has been increasing steadily. After the seasonal adjustment, the 12-month percentage increase of freight traffic since 2012 has been maintained between 12% and 15%. Although the development of industrial economy must be based on the increase of freight traffic, some scholars believe that freight traffic is not an index of added value and thus cannot indicate the GDP growth. However, freight traffic can at least show that the growth rate of GDP is not zero.

Comparing the net processing with the import of gasoline and diesel oil, we can conclude that the consumption status of China is better than its industrial status. The benign situation of gasoline and diesel production (without inventory problem) shows the shift of economic development in China. The consumption of diesel oil is tightly connected to the development of industry and agriculture. Prior to the American economic crisis, the consumption of diesel oil in China had been increasing steadily between 2007 and 2008.

After 2009, diesel consumption once again increased dramatically. These fluctuations of domestic diesel consumption synchronized with the actual economic situation. However, the consumption of diesel oil in the first two seasons of 2012 had only increased by 2%, indirectly indicating the decrease of China’s industrial growth rate in the first two seasons of 2012. The consumption of gasoline is closely tied to the general consumption level. Since 2012, the growth rate of gasoline consumption has exceeded the growth rate of diesel oil consumption, indicating that China’s general consumption status is more stable than China’s industrial status.

The production of steel product and cement can be used in certain indirect approaches to examine the fixed assets investment data and are considered as the wind vane of investment. During the second half year of 2008, the production of steel product and cement had increased dramatically, corresponding to the trend of fixed assets investment at that time. The cement production is higher than steel product because steel product production is heavily influenced its inventory. However, the cost of freight and inventory of cement is relatively high. The newly increased cement product directly reflects the growth of fixed assets investment. The production of steel product and cement have both indicated that the industrial added value during the first two seasons of 2012 did not present negative growth.

The sales volume of wheel loader is not a leading indicator but a lagging indicator of the growth rate of official fixed assets investment. Since fixed assets investment requires the use of excavator, there have been people believing that the growth rate of the sales volume of excavator can be used to predict the growth of fixed assets investment. However, the analysis of associated data leads to a contradictory conclusion. The sales volume of excavator lags behind investment programs because additional excavators are only purchased when the existed ones have been fully depreciated.

The sum of ongoing engineering projects is a leading indicator of fixed assets investment. After the 4 trillion-stimulating-economy policy had been executed since 2009, the 12-month percentage change of total ongoing engineering projects had shown dramatic, positive increase, reaching 30% at its highest point. Between 2010 and 2011, the growth rate of the sum of ongoing engineering projects remained below 10% after National Development and Reform Commission had slowed down its projects review and approval process. Since 2012, the trend of low growth rate continues. In terms of structure, the growth rate of local engineering projects is relatively stable in comparison with the growth rate of central government engineering projects. The growth rate of local engineering project had remained relatively stable even after 2010. Furthermore, the investment platform of local governments has been recently loosely controlled by central government. Ministry of Construction is providing funds for the use of local government and has been transferring funds to local governments that are in need. The sum of ongoing engineering project of local governments will maintain a steady growth. However, the growth rate of the sum of ongoing central engineering project will suffer from relatively large fluctuations.

Besides, those projects have relatively significant supply chain effect, reflecting that the stimulus policy is mostly executed through central government projects. Since 2012, the growth rate of the sum of ongoing central government project has increased dramatically, showing the will of central government to implement macroeconomic control.
The real credit growth is the best indicator used to anticipate investment level of fixed assets. It is also used to further predict the growth rate of GDP.  If cement production is used to represent fixed assets investment, the real credit growth well exceeds the growth rate of cement production. The increased credit in the last month is between 0.6 and 0.7 trillion RMB yuan, lower than the anticipated one trillion. However, the declined inflation rate has increased the actual purchasing power of the loans. Therefore, the real credit has significantly increased. This fact indicates positive growth of future cement output and fixed assets investment, which brings expectation for a stable economy and U-shaped turn in the next two seasons of this year.

Due to the lack of data from service industries, the analysis of consumption can only be based on information from other areas including retail sales and per capita income of urban households. In terms of nominal value, the growth rate of social retail sales did not respond to the financial crisis and remained stable during the early stage of 2008.

However, the real retail sales declined dramatically in 2008, indicating that overseas market demand had negatively impacted domestic consumption status. Deviation of real value from nominal value is not rare. Many phenomena in China cannot be understood by only looking at data of nominal value. Since 2012, the growth rate of retail sales has decreased. However, there is no indication of further decline.

The sales growth of certain products can also be referred during the analysis of consumption in China. However, different sectors show significant distinctions. Domestic sales growth of washing machine is negative; however, the export growth rate has reached 10%. The KFC sales growth in China has significantly declined to 10% during the second season of this year, being consistent with the trend of sales of washing machine. Besides, the raise of salary in KFC has also declined from 18% to the current level of 15%.

Data from Hong Kong and Macao can also contribute to the analysis of consumption status in Chinese mainland. In Hong Kong, 40% to 50% of the sales volume is contributed by consumers from the mainland. A portion of the casino income in Macao is also contributed by Chinese mainland consumers. These two portions of income in Hong Kong and Macao can represent the consumption level of Chinese middle and high income classes. The 12-month percentage change of the growth rate of retail sales in Hong Kong and the casino income in Macao have been negative since 2011. This decline has become increasingly significant during the recent months, indicating reduced consumption level of the high-income class in mainland China.

Employment data significantly lags behind investment, consumption. Also, there are only a limited number of industries that publish employment information. Therefore, it is difficult to keep up with the changes in employment. Ministry of Labor and Social Security concluded a labor demand-supply ratio after conducting research in 100 cities. This ratio shows relatively accurate employment situation. In 2008, between 20 and 30 million rural migrant workers went unemployed. However, since those people are not included in the statistics of urban unemployment, the official unemployment level is undervalued. The labor demand-supply ratio has accurately showed the negative impact of the financial crisis on Chinese job market. Since 2010, the labor demand-supply ratio has remained above 100, indicating structural shift in the Chinese labor market and corresponding to the discussion of Lewisian turning point in the academia. After 2012, the labor demand-supply ratio has declined, corresponding to the reduction in investment and consumption mentioned before.

The growth rate of individual income tax has usually been used as an indicator by foreign countries. However, it can hardly be used to reflect the status of Chinese labor market. After 2012, the growth rate of individual income tax in China has remained negative. However, the total tax revenue has increased. This contradiction is caused by adjustments in the policy regarding individual income tax in China. Ignoring the impact of those adjustments can easily arrive at a pessimistic conclusion in the prediction of growth rate of individual income tax.

PMI (Purchasing Managers Index) is a decent indicator used to reflect changes in labor market. This indicator has two sections: manufacturing industry and non-manufacturing industry. After subtracting 50 from the respective index, a positive result indicates increase in employment, and a negative result means decline in employment. So far, the employment index in manufacturing industry is relatively low, and although non-manufacturing industry has better employment situation, its employment growth rate has declined. Raw material- finished goods inventory index is a leading indicator of PMI and can be used as an indicator of future employment in China. Enterprises with few raw materials in stock tend to reduce the amount of labor used. Recently, raw material- finished goods inventory index has been declining, indicating that the production of Chinese industrial companies has still not yet increased, and therefore employment may still not yet to increase.

The confidence and anticipation of consumers can impact on the future of Chinese economy. Google only has 10-15% of the market share in China. However, it can provide more data than any other Chinese searching engine. Google standardizes the popularity of most searched key words using a scale of 1 to 100. The score of certain key words can reflect the psychological shift of people to some extent. In 2009, the popularity scale of the key word “Economic Recovery” is much higher than “Economic Slowdown”. However, it went the other around in 2010, indicating the increasing concern of people about economic slowdown. The searching frequencies of “American Economic Crisis” and “Chinese Economic Crisis” are very high during 2008 and 2009. However, those key words are replaced by “European Debt Crisis” in 2011. Now, the searching frequencies of “Inflation” and “Pork” are very low. The searching frequencies of “Car Purchase” and “Bank Financing” are very high, indicating that people are not overly concerned about inflation but are very interested in buying cars and bank financing.

Summary by Stephen Green (Zhihao Wang)
“Many suspect that China’s GDP data is smoothed – in the downtimes it is smoothed up. In a downturn electricity production numbers might now be exaggerated. We prefer tracking freight traffic (a mix of truck, rail and river), which is currently doing OK (14% y/y in H1), and diesel through-put (which is weak, running at 2% y/y in H1).

Fixed asset investment numbers often look too high, thanks to the incentive for local officials to over-report, as well as the inclusion of non-value added transactions. We like cement production, since it is heavy and cannot be stored easily, as an investment proxy. Wheel-loader sales lag investment, rather than lead. We like real credit growth as a leading indicator for investment – and thus GDP. Real credit growth has accelerated nicely in recent months, providing some hope for H2 stabilization and a gradual U-shaped recovery.  We also watch long-term loan growth, which has bottomed out.

Central government project growth has accelerated, as the “non-stimulus stimulus” has been implemented. Such projects have big supply chain implications. Financing for local government platforms has been loosened a bit; local government project growth is holding steady. The MoR has financing available to it and is sending down orders.

Finding proxies for retail sales is difficult – different sectors behave differently. Washing machine sales are doing terribly; fast food sales have decelerated less Hong Kong retail sales and Macau gambling revenues is telling us about higher-middle income spending (as well as – possibly – hot money outflows). Tracking services is really hard.

Since 2009, the NBS has run a 30-city unemployment survey, which is not published. It misses industrial zones and returned migrants. We track the labour demand-supply ratio from the MoLSS, as well as movements in the employment numbers within PMI. Individual tax income is likely a less reliable indicator of the jobs market because of the exclusion of low-income groups in 2011.

Google only has a 10-15% market share in China, but provides more accessible data on search patterns than local engines. Currently, China’s internet users do not appear worried about a China economic crisis, and are less worried about inflation (and pork prices). Folk seem still interested in buying a car – and are really still interested in wealth management products.”

（written by 蔡晓慧, translated by Ricky Binhai Hu)

Zhihao Wang (Stephen Green): Discussion of Chinese Economic Data

Apr 18-2013   



 

The authenticity of the growth rate of Chinese GDP has always been doubted by those on the outside. It is easy to arrive at the conclusion that China has no economy cycle by looking at only the official data because the growth rate of China’s GDP has been a relatively stable time series after the seasonal adjustments. During the Asian Financial Crisis in 1998, China’s growth rate of GDP was at 7.8%. During the American Economic Crisis in 2008, the lowest point of China’s growth rate of GDP remained at 6.1%. During the crises, the Chinese official GDP growth rates did not show significant decrease, while during in China’s rapid economic growth period between 2006 and 2007, the official GDP growth data also failed to show a dramatic increase. These phenomena have caused foreign scholars to believe that Chinese government has purposely lowered the GDP growth rate in its reports in order to the concern from Western countries about the rapid development of Chinese economy. Therefore, it is necessary to monitor economic data from various aspects of the Chinese economy in order to achieve an accurate and comprehensive understanding of the situation.

Power generation is an important indication of China’s GDP. Power generation and industrial added value had not been in synchronization since 2008. After 2011, power generation in China sagged, while industrial added value continued to grow positively. Some scholars had pointed out that in order to carry out the national policy of reducing GDP energy intensity, local government had reduced power generation. Another view states that in order to avoid the limitation on power generation, power companies have been purposely reporting undervalued data.

In comparison with electricity generation, freight traffic (including highway, railway, and water transportation) and diesel oil data are more reliable to indicate China’s GDP growth. Freight traffic has been increasing steadily. After the seasonal adjustment, the 12-month percentage increase of freight traffic since 2012 has been maintained between 12% and 15%. Although the development of industrial economy must be based on the increase of freight traffic, some scholars believe that freight traffic is not an index of added value and thus cannot indicate the GDP growth. However, freight traffic can at least show that the growth rate of GDP is not zero.

Comparing the net processing with the import of gasoline and diesel oil, we can conclude that the consumption status of China is better than its industrial status. The benign situation of gasoline and diesel production (without inventory problem) shows the shift of economic development in China. The consumption of diesel oil is tightly connected to the development of industry and agriculture. Prior to the American economic crisis, the consumption of diesel oil in China had been increasing steadily between 2007 and 2008.

After 2009, diesel consumption once again increased dramatically. These fluctuations of domestic diesel consumption synchronized with the actual economic situation. However, the consumption of diesel oil in the first two seasons of 2012 had only increased by 2%, indirectly indicating the decrease of China’s industrial growth rate in the first two seasons of 2012. The consumption of gasoline is closely tied to the general consumption level. Since 2012, the growth rate of gasoline consumption has exceeded the growth rate of diesel oil consumption, indicating that China’s general consumption status is more stable than China’s industrial status.

The production of steel product and cement can be used in certain indirect approaches to examine the fixed assets investment data and are considered as the wind vane of investment. During the second half year of 2008, the production of steel product and cement had increased dramatically, corresponding to the trend of fixed assets investment at that time. The cement production is higher than steel product because steel product production is heavily influenced its inventory. However, the cost of freight and inventory of cement is relatively high. The newly increased cement product directly reflects the growth of fixed assets investment. The production of steel product and cement have both indicated that the industrial added value during the first two seasons of 2012 did not present negative growth.

The sales volume of wheel loader is not a leading indicator but a lagging indicator of the growth rate of official fixed assets investment. Since fixed assets investment requires the use of excavator, there have been people believing that the growth rate of the sales volume of excavator can be used to predict the growth of fixed assets investment. However, the analysis of associated data leads to a contradictory conclusion. The sales volume of excavator lags behind investment programs because additional excavators are only purchased when the existed ones have been fully depreciated.

The sum of ongoing engineering projects is a leading indicator of fixed assets investment. After the 4 trillion-stimulating-economy policy had been executed since 2009, the 12-month percentage change of total ongoing engineering projects had shown dramatic, positive increase, reaching 30% at its highest point. Between 2010 and 2011, the growth rate of the sum of ongoing engineering projects remained below 10% after National Development and Reform Commission had slowed down its projects review and approval process. Since 2012, the trend of low growth rate continues. In terms of structure, the growth rate of local engineering projects is relatively stable in comparison with the growth rate of central government engineering projects. The growth rate of local engineering project had remained relatively stable even after 2010. Furthermore, the investment platform of local governments has been recently loosely controlled by central government. Ministry of Construction is providing funds for the use of local government and has been transferring funds to local governments that are in need. The sum of ongoing engineering project of local governments will maintain a steady growth. However, the growth rate of the sum of ongoing central engineering project will suffer from relatively large fluctuations.

Besides, those projects have relatively significant supply chain effect, reflecting that the stimulus policy is mostly executed through central government projects. Since 2012, the growth rate of the sum of ongoing central government project has increased dramatically, showing the will of central government to implement macroeconomic control.
The real credit growth is the best indicator used to anticipate investment level of fixed assets. It is also used to further predict the growth rate of GDP.  If cement production is used to represent fixed assets investment, the real credit growth well exceeds the growth rate of cement production. The increased credit in the last month is between 0.6 and 0.7 trillion RMB yuan, lower than the anticipated one trillion. However, the declined inflation rate has increased the actual purchasing power of the loans. Therefore, the real credit has significantly increased. This fact indicates positive growth of future cement output and fixed assets investment, which brings expectation for a stable economy and U-shaped turn in the next two seasons of this year.

Due to the lack of data from service industries, the analysis of consumption can only be based on information from other areas including retail sales and per capita income of urban households. In terms of nominal value, the growth rate of social retail sales did not respond to the financial crisis and remained stable during the early stage of 2008.

However, the real retail sales declined dramatically in 2008, indicating that overseas market demand had negatively impacted domestic consumption status. Deviation of real value from nominal value is not rare. Many phenomena in China cannot be understood by only looking at data of nominal value. Since 2012, the growth rate of retail sales has decreased. However, there is no indication of further decline.

The sales growth of certain products can also be referred during the analysis of consumption in China. However, different sectors show significant distinctions. Domestic sales growth of washing machine is negative; however, the export growth rate has reached 10%. The KFC sales growth in China has significantly declined to 10% during the second season of this year, being consistent with the trend of sales of washing machine. Besides, the raise of salary in KFC has also declined from 18% to the current level of 15%.

Data from Hong Kong and Macao can also contribute to the analysis of consumption status in Chinese mainland. In Hong Kong, 40% to 50% of the sales volume is contributed by consumers from the mainland. A portion of the casino income in Macao is also contributed by Chinese mainland consumers. These two portions of income in Hong Kong and Macao can represent the consumption level of Chinese middle and high income classes. The 12-month percentage change of the growth rate of retail sales in Hong Kong and the casino income in Macao have been negative since 2011. This decline has become increasingly significant during the recent months, indicating reduced consumption level of the high-income class in mainland China.

Employment data significantly lags behind investment, consumption. Also, there are only a limited number of industries that publish employment information. Therefore, it is difficult to keep up with the changes in employment. Ministry of Labor and Social Security concluded a labor demand-supply ratio after conducting research in 100 cities. This ratio shows relatively accurate employment situation. In 2008, between 20 and 30 million rural migrant workers went unemployed. However, since those people are not included in the statistics of urban unemployment, the official unemployment level is undervalued. The labor demand-supply ratio has accurately showed the negative impact of the financial crisis on Chinese job market. Since 2010, the labor demand-supply ratio has remained above 100, indicating structural shift in the Chinese labor market and corresponding to the discussion of Lewisian turning point in the academia. After 2012, the labor demand-supply ratio has declined, corresponding to the reduction in investment and consumption mentioned before.

The growth rate of individual income tax has usually been used as an indicator by foreign countries. However, it can hardly be used to reflect the status of Chinese labor market. After 2012, the growth rate of individual income tax in China has remained negative. However, the total tax revenue has increased. This contradiction is caused by adjustments in the policy regarding individual income tax in China. Ignoring the impact of those adjustments can easily arrive at a pessimistic conclusion in the prediction of growth rate of individual income tax.

PMI (Purchasing Managers Index) is a decent indicator used to reflect changes in labor market. This indicator has two sections: manufacturing industry and non-manufacturing industry. After subtracting 50 from the respective index, a positive result indicates increase in employment, and a negative result means decline in employment. So far, the employment index in manufacturing industry is relatively low, and although non-manufacturing industry has better employment situation, its employment growth rate has declined. Raw material- finished goods inventory index is a leading indicator of PMI and can be used as an indicator of future employment in China. Enterprises with few raw materials in stock tend to reduce the amount of labor used. Recently, raw material- finished goods inventory index has been declining, indicating that the production of Chinese industrial companies has still not yet increased, and therefore employment may still not yet to increase.

The confidence and anticipation of consumers can impact on the future of Chinese economy. Google only has 10-15% of the market share in China. However, it can provide more data than any other Chinese searching engine. Google standardizes the popularity of most searched key words using a scale of 1 to 100. The score of certain key words can reflect the psychological shift of people to some extent. In 2009, the popularity scale of the key word “Economic Recovery” is much higher than “Economic Slowdown”. However, it went the other around in 2010, indicating the increasing concern of people about economic slowdown. The searching frequencies of “American Economic Crisis” and “Chinese Economic Crisis” are very high during 2008 and 2009. However, those key words are replaced by “European Debt Crisis” in 2011. Now, the searching frequencies of “Inflation” and “Pork” are very low. The searching frequencies of “Car Purchase” and “Bank Financing” are very high, indicating that people are not overly concerned about inflation but are very interested in buying cars and bank financing.

Summary by Stephen Green (Zhihao Wang)
“Many suspect that China’s GDP data is smoothed – in the downtimes it is smoothed up. In a downturn electricity production numbers might now be exaggerated. We prefer tracking freight traffic (a mix of truck, rail and river), which is currently doing OK (14% y/y in H1), and diesel through-put (which is weak, running at 2% y/y in H1).

Fixed asset investment numbers often look too high, thanks to the incentive for local officials to over-report, as well as the inclusion of non-value added transactions. We like cement production, since it is heavy and cannot be stored easily, as an investment proxy. Wheel-loader sales lag investment, rather than lead. We like real credit growth as a leading indicator for investment – and thus GDP. Real credit growth has accelerated nicely in recent months, providing some hope for H2 stabilization and a gradual U-shaped recovery.  We also watch long-term loan growth, which has bottomed out.

Central government project growth has accelerated, as the “non-stimulus stimulus” has been implemented. Such projects have big supply chain implications. Financing for local government platforms has been loosened a bit; local government project growth is holding steady. The MoR has financing available to it and is sending down orders.

Finding proxies for retail sales is difficult – different sectors behave differently. Washing machine sales are doing terribly; fast food sales have decelerated less Hong Kong retail sales and Macau gambling revenues is telling us about higher-middle income spending (as well as – possibly – hot money outflows). Tracking services is really hard.

Since 2009, the NBS has run a 30-city unemployment survey, which is not published. It misses industrial zones and returned migrants. We track the labour demand-supply ratio from the MoLSS, as well as movements in the employment numbers within PMI. Individual tax income is likely a less reliable indicator of the jobs market because of the exclusion of low-income groups in 2011.

Google only has a 10-15% market share in China, but provides more accessible data on search patterns than local engines. Currently, China’s internet users do not appear worried about a China economic crisis, and are less worried about inflation (and pork prices). Folk seem still interested in buying a car – and are really still interested in wealth management products.”

（written by 蔡晓慧, translated by Ricky Binhai Hu)