China’s real economic growth rate consistently divides the markets. Some believe the 7% figure reported by the government is accurate, merely reflecting surging activity in the services sector as other areas of the economy slow, while other believe it’s too good to be true, particularly given weakness in other data releases such as industrial production, fixed asset investment and PMI surveys.
According to MFS Investment Management, economic growth in China is not as robust as the official government figures would suggest, suggesting that the economy is almost certainly growing well below 7%.
“To put that 7% growth rate in perspective, it’s important to note that China’s GDP numbers are published shortly after the quarter ends, with virtually no subsequent revisions. The Chinese data collection and dissemination agencies tend to focus on things that can be counted — like cargo traffic, electricity generation and industrial production. These outputs seem to be growing much more slowly, calling into question the steady 7% growth rate,” they wrote.
The group points to the chart below that tracks growth in cargo traffic, electricity production and industrial production compared to official GDP growth figures to reinforce their view.
Traditional measures of economic activity that can be counted are clearly not growing as fast as the official growth figure. Electricity production and rail freight volumes are growing at 3% per annum while industrial production, at 6%, is still well short of the 7% GDP rate reported.
Can growth in services and consumption really explain the divergence between the GDP figure and other traditional measures of economic activity? It’s a question that markets continue to grapple with as sentiment towards the economy continues to sour.
MFS picks up on the confusion among investors, suggesting that China’s transition away from traditional drivers of growth such as industrial output and trade to consumption and services is further clouding matters.
“China may not be as dominated by services, but we believe this sector is growing much faster as a share of the economy than it was five to ten years ago. And its contribution to growth is generally much harder to measure,” they note.
“As long as China’s GDP accounting continues to focus on the production of countable goods while underestimating uncountable services, GDP measures are likely to be confusing.”
While some may disagree with MFS’ assessment, pointing to an acceleration in growth in services growth during the second quarter to explain the steady 7% growth rate reported, it is clear that doubts about Chinese growth will not disappear any time soon. On October 19 China’s government will release updated Q3 GDP figures, something that will almost certainly see this debate fire up, especially given further weakening in corresponding economic data – not only in China but its key regional trading partners – over the past three months.