What the ‘Unofficial’ Data Say About China’s Slowdown

July 18, 2013, 5:19 PM

What the ‘Unofficial’ Data Say About China’s Slowdown

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With doubts about China’s official data as numerous as government censors at a Weibo convention, China Real Time is committed to uncovering the truth about the world’s second-largest economy. The latest plan: Hire an intern to mine data from statistics officials’ Renren accounts. On the off chance the National Bureau of Statistics aren’t big users of social media, here’s our illustrated guide to what the best private indicators say.The official data shows growth on target at 7.5% year-on-year in the second quarter. But on a quarter-on-quarter annualized basis – the way in which growth is measured in the U.S. – the picture isn’t as rosy.

The National Bureau of Statistics put the sequential growth rate at just shy of 7% in the second quarter, up from 6.6% in the first. Estimates from investment bank analysts are in the same ballpark and also show growth accelerating moderately in the second quarter.

By contrast, business surveys show the economy continuing to lose momentum. The HSBC Markit purchasing managers’ index suggests conditions in the manufacturing sector deteriorated in June. A survey by Market News International also pointed to worsening conditions.

With political attention focused on headline numbers like GDP, some analyst favor tracking lower-profile indicators, on the theory they are less likely to be meddled with. A composite of indicators including electricity output, passenger traffic, and seaport cargo put together by Capital Economics shows growth at 6% year-on-year in May, down from 7.3% at the end of 2012.

 

China’s government is hoping that consumption will start to play a bigger role in driving growth. The official numbers show that effort has stalled, with growth in retail sales slowing to 12.7% in the first half of 2013.

Data from leading retailers paint an even bleaker picture. Yum Brands – purveyors of KFC – saw China same-store sales drop 20% year-on-year in the second quarter.  Nike saw Greater China sales fall 1% (pdf).  Those results reflect some company specific issues – broader Chinese food-safety issues stand out in the case of Yum – but they also suggest China’s consumer market is far from booming.

A combination of slower wage growth and uncertainty about the economic outlook seemed to weigh on consumer sentiment. An April survey of 1,000 consumers across 12 cities by the Boston Consulting Group found that just 27% planned to increase spending in the year ahead, down from 38% in 2012.

 

If China’s consumers were losing confidence, their counterparts in the U.S. and Europe must be positively despondent. China’s overseas sales fell 3% year-on-year in April, a sharp downturn from 15% growth in April.

In part, that reflects a crackdown by China’s regulator on illegal use of the trade account to bring hot money into the country. Over invoicing by Chinese firms was evident in a sharp divergence between China’s data on exports to Hong Kong and Hong Kong data on imports from China.

Despite lackluster demand, Chinese exporters expressed confidence about the outlook. Some 70% of 503 exporters interviewed by Global Sources in April expected an increase in revenue in the second half, up from 51% the last time the survey was conducted.

 

Weak consumer demand at home and abroad throws China back on its old reliance on investment as the key driver of growth. That’s reflected in the alternative indicators, which show signs of capital spending picking up.

A resurgent real estate sector — with sales, prices, and construction all rising — is driving strong land sales. Floor area sold is showing some signs of coming off the boil, but was still up 9% year-on-year in June according to data from property agency Soufun. Sales of construction equipment are also coming back, with excavator sales up in April and May after almost two years of falling.

Still, stronger construction wasn’t enough to turn around metals prices. Steel and copper prices on the Shanghai market continued to slide.  That reflects weak demand, and also substantial overcapacity at China’s furnaces.

 

Despite the slowdown in growth, employment showed signs of holding up. Zhaopin.com, one of China’s biggest online recruitment websites, reported a 40% year-on-year increase in online job adverts in June. Making historical comparisons is difficult because Zhaopin’s business is expanding, but at the least that suggests the labor market isn’t collapsing.

The HSBC Markit PMI surveys point to a mixed picture. The manufacturing survey shows factories shedding workers, but at a more moderate pace than during the financial crisis. The service sector, meanwhile, continues to add jobs, with restaurants and hair salons replacing iPhone assembly lines as the driver of employment growth.

Not all the analysis on labor markets is positive.

The Ministry of Human Resources and Social Security data on the labor market supply demand balance is widely viewed as a good indicator of China’s employment situation. The second quarter data shows demand exceeding supply by a healthy margin.

FOST – a leading Chinese research agency — says that doesn’t provide a reliable guide because only a fraction of the unemployed seek work in the government employment bureaus where data are collected. FOST also point out that unemployment is a lagging indicator, with a rise in joblessness typically coming months behind a slowdown in growth.

Still, with China’s leaders focused on labor markets as a key measure of economic health, and few signs so far of rising unemployment, the chances of a shift to stimulus are reduced.

 

Inflation also appears subdued. AliResearch’s Internet Shopping Price Index shows prices rising a modest 3.7% year-on-year in June.  That’s higher than the 2.7% increase registered by the official consumer price index, but still not particularly concerning. Low inflation would open up room for monetary easing, were the government not so worried about runaway credit growth.

House prices, meanwhile, continued on a tear. Soufun data shows national average prices up 7.4% in June, compared with 6.9% in May. That likely reflects speculative funds flowing back into the sector. But with real estate construction one of the few forces keeping the economy ticking over, Beijing is unlikely to clamp down too hard on rapid increases in prices.

Many analysts believe that fiscal policy – higher spending by the government – will do the legwork in supporting growth in the second half of the year.

The official data suggests government debt and borrowing are low. But that doesn’t take account of borrowing by local governments. Estimates by the International Monetary Fund, published in their annual review of the Chinese economy on Wednesday, put the true level of government borrowing considerably higher, projecting an augmented fiscal deficit of 7.2% of GDP for the year. That suggests the room for a fiscal stimulus is also smaller than widely believed (pdf).

Overall the alternative indicators paint a picture that is not radically different to the official numbers.

Sequential growth is weak, and some low-profile indicators suggest it may be slower than reported. Consumption growth is disappointing and investment is playing a bigger role in driving the economy. Labor markets are holding up, with the services sector doing better than manufacturing. Inflation is subdued for consumer prices but with worrying signs in property. With debt levels high, the space for a stimulus is limited.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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