China GDP Preview: Statistics and reality in the Chinese economy

China's National Bureau of Statistics will release a series of important statistics on Monday January 21st at 2:00 am GMT, 9:00 pm January 20th EST--fourth quarter GDP, y/y and q/q, retail sales for December, and industrial production y/y for December.

Predictions

China's annual gross domestic product is forecast to decrease to 6.4% in the fourth quarter from 6.5% in the previous three months. On the quarter it is predicted to slip to 1.5% from 1.6%. Retail sales in the twelve months to December are expected to increase to 8.2% on the year from 8.1 % in November. Industrial productions y/y is thought to have fallen to 5.3% in December from 5.4%. 

China: one side of a bi-polar world

China's economic ascent over the past generation has made it the second most important nation in the global economy.  A dynamic mainland in tandem with the United States is enough to carry the rest of the world to a successful year. China is the fulcrum for most of Asia and its demand is key to the health of the resource extraction complex from Australia to the Gulf States.

If China’s growth slows appreciably from its current level the global economy, including the United States will be hard pressed not to follow it down.

China’s Economic Trajectory and Statistics

China’s economic growth has been declining for five years, from 8.1% in the last quarter of 2012 to 6.5% in the third quarter of this year.

Chart: FXStreet

There has been remarkable consistency between the consensus market estimates and the actual statistic. In the last five years the estimate for the quarterly annual growth has not missed by more than 0.1%. That is such a remarkable performance it bears repeating.  In five years, 19 quarters, the consensus market judgement has never been off by more than 0.1%. 

Are the economists and analysts that study China that much better than their colleagues elsewhere?

The answer lies not with the economists but with the bureaucrats.

Gross national product is the premier economic statistic for the Chinese economy.   It is touted by the national government as proof that its policies are delivering prosperity to the Chinese people.

The authorities in Beijing announce their GDP goals and when the time for reporting arrives not surprisingly, the result always seems to match.  Put it another way, analysts estimating Chinese economic growth are not especially prescient, they are just good listeners.  Do not look for telling surprises from China’s GDP numbers.  The odds are very much that fourth quarter reported GDP will be 6.3%, 6.4% or 6.5%.

Economists have long argued about the accuracy of many of the statistics produced by the National Bureau of Statistics.   An interesting story reported by the Financial Times earlier in the month underlined how sensitive the Chinese government is on the topic.

A relatively unknown economic professor at Renmin University in Beijing claimed that a secret government group had estimated that China’s GDP in 2018 might be as low as 1.67% instead of the 6.7% official rate through September.  The interesting part of the story is not whether he was right, most analysts dismissed his claim, but the speed and thoroughness with which the Chinese authorities removed his presentation from the Chinese internet. Clearly GDP is a touchy subject.

China’s Economy: How slow is slow?

Almost all major Chinese economic statistics have seen substantial declines in 2018.  Industrial production has dropped from a 7.2% year on year increase in February to 5.4% in November, with a 5.3% forecast in December.

The variation between estimate and result in the last five years has been much broader for this statistic than for the GDP numbers and the surprises have come on both sides. The largest miss in the last five years was 1.9% in August 2014, estimate 8.8%, actual 6.9%.

Chart: FXStreet

Retail sales have decreased from a 10% annual gain in March to 8.1% in November. They are forecast to rise to 8.2% in December.

Here too the variation between estimate and delivery is substantial, with the widest gap being 1.1% in May 2018, estimate 9.6%, actual 8.5%.

Chart: FXStreet

China’s Statistical Reality

China’s position as the world’s second largest economy and the source of about 30% of global economic growth makes it the most important variable for expansion in 2019. But its most quoted and praised statistic is the wrong place to look for signs of difficulty. 

If there are serious problems in the Chinese economy they will show up in secondary numbers like industrial production. A surprise here is of more interest than the 20^th straight achievement in GDP.