January 21, 2009
Chinese Growth Plunges
Jan. 22 -- China's economy expanded at the slowest pace in seven years as the global recession dragged down exports, increasing pressure for more government spending and lower interest rates to buoy growth.
Gross domestic product grew 6.8 percent in the fourth quarter from a year earlier, after a 9 percent gain in the previous three months, the statistics bureau said in Beijing today. The figure matched the median estimate of 12 economists surveyed by Bloomberg News.
This figure updates that presented in this post from
four three months ago.
Figure 1: 4 quarter growth rate in real Chinese GDP, latest vintage (blue) and August 2006 vintage (red). Source: CEIC (older vintage), ADB, and press accounts (newest vintage).
Note that the actual outcome for Q4 was far below the 11/7 forecast from Deutschebank. This illustrates how far growth prospects in China have deteriorated in just a short two and half months.
[Update 6:50pm Pacific]
Reader Mike notes Roubini's q/q annualized growth rate estimate of near zero, and RGE Monitor cites Citi's estimate of -0.3% growth. I think that these are plausible estimates, but they must be based on data in addition to the official government GDP statistics, because that growth rate is very hard to infer from the seasonally unadjusted GDP numbers, shown below.
Figure 2: Log real Chinese GDP, not seasonally adjusted. US NBER-defined recessions shaded gray. Source: CEIC, author's calculations based on ADB data and reported growth rate for 08Q4.
And trust me, running this series through a standard X-12 seasonal adjustment filter doesn't do the trick.
Posted by Menzie Chinn at January 21, 2009 08:48 PMdigg this | reddit
Roubini has an important clarification that this is YoY data and not QoQ SAAR like most countries report. The SAAR was likely ~0.
The Chinese Devil Wears Prada: Why 0% Growth is the New Size 6.8%
Nouriel Roubini | Jan 22, 2009
The Chinese came out today with their 6.8% estimate of Q4 2008 growth. China publishes its quarterly GDP figure on a year over year basis, differently from the U.S. and most other countries that publish their GDP growth figure on a quarter on quarter annualized seasonally adjusted (SAAR) basis.
When growth is slowing down sharply the Chinese way to measure GDP is highly misleading as quarter on quarter growth may be negative while the year over year figure is positive and high because of the momentum of the previous quarters’ positive growth.
Indeed if one were to convert the 6.8% y-o-y figure in the more standard quarter over quarter annualized figure Chinese growth in Q4 would be close to zero if not negative.
Other data confirm that China was in a borderline recession in Q4 and that it may be in an outright recession in Q1: production of electricity plunged 7.9% in y-o-y basis; the Chinese PMI has been below 50 and close to 40 for five months now.
And with manufacturing being about 40% of GDP , manufacturing is certainly in a sharp recession (negative growth) and the overall economy may be close to a recession
So the 6.8% growth was actually a 0% growth – or possibly negative growth – in Q4; and the Q1 figures look even worse. So China is in a recession regardless of what the highly massaged official numbers claim.
Posted by: Mike at January 22, 2009 02:26 AM
Right now I think most countries in the world would kill for a 6.8% growth. You take the negative growth rate for may and you actually come closer to China maintaining their growth rate relative to the rest of the world. That China is growning at all would seem unusual since imports/exports are down significantly.
Consider the following observations made by Tim Swanson, an economist currently living in China.
Household debt in China amounts to roughly 13% of GDP, as opposed to 100% in America.
As shown by the IPO of China Railway, the government remains committed to privatizing state-owned firms. This at a time when many Western governments are nationalizing entire industries.
China continues to implement land reforms. This includes granting land-use rights to peasants, empowering them to lease or transfer land to others — a first in a region that once resembled the collective farms of the Soviet states.
China has begun legalizing short selling and margin trading. In contrast, this past year the West restricted their use or selectively banned them outright in a self-serving manner.
China is opening capital markets through QFII and QDII, lowering real-estate taxes and abolishing others like the stamp tax on home purchases. In addition, Yuan convertibility and capital controls are being relaxed across the region.
China has finally restructured and privatized all of the big national banks. The Agricultural Bank of China (the third largest) recently had its umbilical cord cut and now must sink or swim on its own. This is the opposite of the direction being taken in the West.
Similarly, while the housing bubble deflates, China's political class is not (yet) attempting to prop up the real-estate sector en masse. The Fed and US Treasury are doing everything they can to prevent price deflation by purchasing hundreds of billions in mortgage-backed securities.
Posted by: DickF at January 22, 2009 08:03 AM
That point about China's banking system versus the Western banks is nonsensical. Our banking system was and still remains virtually entirely private. No one can reasonably make the argument that the reason our banking system began to crack in 2007 was due to over-regulation and too much government intervention.
One thing about the Chinese growth rate is that while they are admitting a significant slowdown in growth, when I look at how much their year-on-year growth numbers in industrial production and trade have had an almost perpendicular collapse, I would have to imagine that their month-on-month numbers have really fallen off a cliff. What we are seeing out of international trade and industrial production is not consistent with 6.8% GDP growth.
Posted by: Brian Quinn at January 22, 2009 09:02 AM
I did not read that article carefully enough to realize that they reported their GDP as a year on year number. In that case the numbers are consistent. My mistake. This would indeed indicate there is barely any growth at all in China at the present time.
Posted by: Brian Quinn at January 22, 2009 09:04 AM
United Technologies reported in their earnings call yesterday that their Otis Elevator division had more than 5,000 unit cancellations or delays from China last quarter, mostly from residential construction projects. That was an eye-popping drop off in demand, one they can't hide, and lends credence the notion that things in China are far worse than the commie politburo wants you to think.
Posted by: K at January 22, 2009 09:35 AM
The politburo should consider changing strategies, to under report growth and show how much they are hurting. Global pressure is mounting for China to halt currency interventions that keep the renminbi undervalued. European countries suffering from the still overvalued euro are asking why they should accept unfair competition from Chinese exports and Obama has stated that China must alter its currency policy. That policy has contributed to some rather massive global imbalances. It is too bad if adjustment must come during an economic downturn, because dislocation costs will be higher. However, the incentive to force the adjustment was lacking when everyone was so comfortable leaning on the over extended U.S. consumer.
Posted by: don at January 22, 2009 10:43 AM
It is interesting that in the past the US has been the strongest free market economy in the world, but today even as the free market becomes smaller and smaller as more and more it is absorbed by the US government the free market is blamed for the US decline.
For some perspective relative to China let me quote Tim Swanson again. As you read, recall the criticisms that were leveled against the Japanese a few years ago because their banks refused to write off bad debts with government encouragement.
... in the past year at least 67,000 factories across China have closed down and hundreds of thousands of migrant workers have moved back to family farms. While this phenomenon may be painful in the short run, the Chinese are at least allowing bankruptcy to clear out ineffective business models.
In the United States, failure is no longer an option. In fact, more than $8.5 trillion dollars are being used to prop up catatonic firms such as Citi, Fannie Mae, Freddie Mac, and AIG.
As a result, in the long run, China as a whole will be able to adapt to market conditions and prosper because sick companies will have been expelled from the marketplace and capital will be reallocated to the most efficient participants. Conversely, because the West has given up on bankruptcy and the freedom to fail, they will continue to flounder as they prop up poorly managed firms.
Furthermore, the Chinese not only have relatively high household savings and relatively low corporate debt ratios, but the government continues to privatize state-run firms and allow them to go bankrupt.
Posted by: DickF at January 22, 2009 10:54 AM
China was viewed as a support for the global economy ( A positive force) will it now become a negative force and push down GDP in the US, Euro Zone, Japan, Brazil, Australia, etc, Causing further worsening of the global recession?
Posted by: James at January 22, 2009 02:58 PM
Previously on this blog, I believe I predicted that China would suffer a steeper decline than the US because it has misallocated resources more severely than has the US by massive credit creation & forced saving (to peg the Yuan) & the political allocation of loans via state-controlled banks. Roubini's article noting a decline from 8% growth to 0% implies that this steeper decline is measureably there.
The positives that Dick F sites are interesting but will be overwhelmed by this cycle. China has been as big a contributer to this credit bubble as anyone.
Posted by: Bryce at January 22, 2009 05:39 PM
I fail to understand why people view CNY liberalisation as signifying that CNY will strengthen. With money flowing out of all the EM world why would CNY buck the trend. Add to this all the Western Banks wanting to cash in the trend for CNY weakness becomes quite compelling. In addition from the possible effect on treasuries , I'm not sure that Obama really want CNY to allow more flexibility in their currency right now.
Posted by: Paul at January 22, 2009 06:52 PM
Mike: I've added a graph relevant to your comment re: 0% growth in 08Q4.
Paul: I agree that liberalizing the capital account for China might not lead to appreciation. But I think people are arguing for less intervention by PBoC, which in the current environment might very well lead to appreciation (and surely would have a year ago). In the future, it could be the case less intervention might be consistent with a deteriorating CNY, especially if the slowdown is more persistent and pronounced than currently forecasted.
Posted by: Menzie Chinn at January 22, 2009 07:38 PM
ISI, the economic forecasting firm, agrees with Roubini's estimate that Q4 growth was near zero. Regardless, it is a pretty steep deceleration.
y/y% q/q% A.R.
08Q1 10.6% 11.3%
08Q2 10.1 14.3
08Q3 9.0 2.1
08Q4 6.8 0.5
09Q1e 4.0 0.0
Posted by: MikeR at January 23, 2009 06:44 AM
People, take another look at Menzie's chart -- do they look like real data? Forget about the official GDP numbers, check out their electricity output!
Posted by: pat at January 23, 2009 07:49 AM
A thought came into my mind. Have China's statistics been adjusted for yuan revaluation agianst the dollar?
Paul, thanks for your post jogging this thought.
Posted by: DickF at January 23, 2009 09:21 AM
Paul: "I fail to understand why people view CNY liberalisation as signifying that CNY will strengthen. With money flowing out of all the EM world why would CNY buck the trend. Add to this all the Western Banks wanting to cash in the trend for CNY weakness becomes quite compelling. In addition from the possible effect on treasuries , I'm not sure that Obama really want CNY to allow more flexibility in their currency right now."
As long as China's CB is a net purchaser of foreign exchange, 'liberalization' would lead to a rise in the renminbi. China is still a big net purchaser. Read Brad Setser's blog to get a notion of how big and what is happening to the official purchases.
Posted by: don at January 23, 2009 10:16 AM
DickF: The Chinese GDP is in inflation adjusted yuan, so there is no adjustment for revaluation. Not sure what sort of "adjustment" you mean? There is a "terms of trade adjusted GDP" which I discuss in this post. That's not what is reported in this figure.
don: If the capital account and financial system were "liberalized" (e.g., capital controls removed), it's not clear what would happen. If the PBoC stopped intervening, then in the absence of capital control removal, it would probably appreciate. Hence, it is useful to distinguish between "liberalize", which usually pertains to the regulations on the external accounts or the financial system, and reducing forex intervention.
Posted by: Menzie Chinn at January 23, 2009 12:50 PM
Actually, the average US Consumer has a debt/equity ratio of around 140%
Posted by: James Cessna at January 23, 2009 02:47 PM
Your observation is acute and I had the same thought - I am reminded of one of the techniques the IRS uses to catch falsified tax returns - patterns that emerge in numbers that are made up vs. more randomly generated.
Posted by: energyecon at January 27, 2009 03:14 PM