China’s ‘Strong’ GDP Report Actually Reveals How Easily The Country Could Go Into A Hard Landing

This post has been updated to reflect a change from real to nominal growth regarding the figures quoted from the Financial Times.

Today, China’s National Bureau of Statistics (NBS) released the end-of-the-year GDP figures of 2011.  According to official tallies, China’s GDP grew 8.9% in the 4th Quarter, a steady but modest decline compared to 9.7% in Q1, 9.5% in Q2, and 9.1% in Q3.  GDP growth for the full year was 9.2%.

Earlier today, I was interviewed on BBC about what these numbers mean.  You can watch the interview here.  You can also read my comments to the Washington Post here.

There are two pieces of data I saw today, easily lost in the fine print, that I found particularly revealing.  First, the NBS disclosed that real estate investment accounted for 13% of China’s GDP in 2011 (compared to Stephen Roach’s estimate of 10%), and grew at a rate of 27.9%. However, I noticed something that I admit I missed before, in my earlier calculations — that this is a nominal rate (not adjusted for inflation) whereas the GDP growth rate figures are real (they take inflation into account).  The real (and therefore comparable) rate of expansion for real estate investment in 2011 was 20.0%.

So I went back and re-ran the numbers, using these more accurate figures.  Given GDP growth of 9.2% (a higher starting point than I used in my initial calculations), a real growth rate of 20.0% for real estate implies a real growth rate of 7.6% for the rest of the economy.  If, in 2012, real estate construction were merely to level off at zero growth, and the rest of the economy was unaffected, that would bring overall GDP down from 9.2% to 6.6%.  That’s higher than the number I initially came up with, but still well into “hard landing” territory.  The fall-off of 2.6% is also closer to the 3.0% drop I initially calculated than the 1% decline predicted by Stephen Roach.  I errored in my back-of-the-envelope exercise, but my point remains a valid one.  Keep in mind, these calculations assume no impact on dependent industries like steel and cement, no impact on the financial system, and no correlation to related risks in the Chinese economy — the latter two of which I will expand upon in my next post of the series.

Here are my revised calculations, using a GDP index of 1000 for the base year, for those who wish to see:


How realistic is a levelling-off of real estate investment?  This is where the second piece of data I noticed fits in.  The NBS — somewhat curiously– did not publish December figures for property and other fixed asset investment.  However, the Financial Times did interview Wei Yao, an economist at Société Générale, who made some of his own calculations.  According to him, the growth rate for real estate investment saw a rapid deceleration from 20.1% in November to 12.3% in December (it’s clear from looking at the original source data that these are nominal rates; the real rates to plug into the GDP equation would be substantially lower).

The FT article also notes a nearly 25% decline in new housing starts in December and a 26% year-on-year rise in unsold property.  And it’s not merely real estate investment that’s decelerating.  Nominal growth in fixed asset investment as a whole — hitherto the main driver of growth in the Chinese economy — dropped from 25% y-on-y in October to 21.2% in November and 18.5% in December.  That’s precisely the kind of broader deceleration I’m going to be focusing on the next instalment (Part 2B) of my analysis.