Assessing China’s Economic Risks

First quarter GDP in China rose 6.9%, better than expected and above the government’s target (6.5%) for 2017. It stands to reason, however, that if Communist officials thought they could get 6.9% to last for the whole year they would have made it their target, especially since 6.5% would be less than the GDP growth rate for 2016 (6.7%). In only that one way is China’s GDP statistic meaningful. Due to unanswered questions about its accuracy, it barely rates any mention at all.

The problems with China GDP appear to be spreading to other statistics, particularly Industrial Production. IP had been almost perfectly stable exhibiting, like GDP, very little variation. Prior to this latest update, it was steady between 6% and 6.3% for eleven months in a row, and going back to the start of 2015 only twice did it vary so much on the high side (6.8% in both June 2015 and March 2016). It seems quite reasonable that given global conditions particularly for manufacturing and then the trade of goods during that period China was overstating its industrial production to like GDP make a bad situation appear to be at least somewhat more balanced than it might have been (to be clear, this is speculation on my part as there is no evidence there is any directive for IP).

Therefore, the IP figure for March 2017 of 7.6% clearly stands out not just for being the highest growth rate since January 2015 but because it seems to relate to other statistics like export growth. Judging by Chinese exports, industrial production by early 2016 might have been as low as 3%, perhaps even 2%. The acceleration in the IP rate for March 2017 is then the correlation to exports which in Q1 2017 were positive for the first time (on a quarterly basis) in several years.

As I wrote last month:

The rest of China’s statistics propose the same assumptions. Industrial production at 6.3% is no different at all than the level of growth it has been for two years now. The noticeable lack of volatility in the changes month-to-month continues to suggest (louder) less reliability, perhaps, than might be hoped for (like China’s GDP estimates). If there were actually some appreciable acceleration in Chinese industry we would expect to see it here, meaning that it is very likely only the downside that might be obscured by an almost perfect and increasingly likely artificial sideways trend.