Digging deeper into the numbers

Seasoned China watchers are accustomed to the grab bag of oddities that can arise from official economic data. Scepticism is common. But the figures from the first quarter report contained some interesting underlying messages.

As reported, the 6.4 per cent quarterly growth rate was an upside surprise - if still China’s slowest expansion in ten years. However, what the published number actually implies - with some unofficial adjustment for seasonality - is a significant pick-up in real growth compared to the prior three quarters, approaching nearly 7 per cent on an annualised basis.

Source: China National Bureau of Statistics/Haver Analytics, Fidelity International, April 2019

Mind the nominal GDP slowdown

But more enlightening is the sharp slowdown in nominal GDP, measured at current prices and unadjusted for inflation. This registered marginally the slowest quarterly rate of growth since 2009, roughly in-line with the more recent 2015 trough. In a sense, this is no surprise. The significant manufacturing disinflation we saw in the first quarter, as reflected by the producer price index, was consistent with real industrial growth - adjusted for price changes - being faster than nominal. However, economists will be highly sceptical that manufacturing GDP truly grew at the rapid double-digit real rates that the data implies in a quarter that was otherwise characterised by strong deflationary pressures. The same can be said of March’s surprise surge in reported industrial production, suddenly showing the fastest growth since 2014 - this appears out of sync with the PPI weakness.

Another concern is the continued slowdown in services GDP growth. This sector should be the driving force behind China’s domestic consumption story. Instead, it slowed to the weakest year-on-year growth on record, plunging below 5 per cent quarterly annualised growth.

The story behind the story

As such, the real message from this data is that China felt compelled to give the markets an upside surprise, even though a more careful examination of the data raises doubts. Policymakers appear to be trying to help markets, companies and consumers regain confidence, to reverse the deeply negative economic momentum that China experienced towards the end of 2018.

Further evidence for this stance is clear from recent policy measures. Despite forceful and repeated statements from high-ranking officials that China would not resort to ‘flood-like’ stimulus measures, first quarter credit expansion was far higher than the previous quarterly record, rising an incredible 40 per cent year-on-year. These are not the actions of a government content that the economy will basically be OK, with just a little fine-tuning.

The takeaway: all eyes on credit

So, the crucial question for markets is: Will China’s stimulus work? Key bellwethers are mixed so far. March data pointed to a surprising upturn in China’s real estate sector, but still-anaemic infrastructure spending. However, credit only impacts real activity with a lag measured in quarters, so it would not be a surprise if we get a few monthly disappointments in the near-term. That said, China’s credit data has proved over the past decade to be one of the most important leading indicators both for Chinese activity and, in turn, the global economy.

Despite the mixed messages in the latest GDP numbers, the main thing for investors to watch out for will be the impact of China’s incredible credit upturn - coming to an economy near you, later in 2019.