Tuesday, China’s National Bureau of Statistics releases its first estimate of 2015 gross domestic product.
Premier Li Keqiang on Saturday said growth last year came in around 7% for 2015, which was his target, announced last March.
Analysts polled by Reuters peg growth at 6.9%, which would be the lowest rate in 25 years.
Indicators for the year, however, point to a number in the low single digits, perhaps 1%.
In 2007, when Li was Communist Party secretary of Liaoning province, he told a visiting American diplomat that Beijing’s figures were “man-made,” politically directed and therefore unreliable. He said he looked at three factors when trying to understand what the economy was really doing: electricity consumption, rail freight volume, and bank lending.
So what does the “Li Keqiang Index,” as these factors are now known, tell us? The usage of electricity remains the most reliable single indicator of Chinese economic activity. In the first 11 months of 2015, electricity consumption increased 0.7%.
Rail freight volume fell 10.5% in 2015, according to Caixin, which cited the National Railway Administration.
New renminbi loans last year, according to the People’s
The net increase in lending is impressive, but total social financing, a broader measure of lending that did not exist in 2007, fell in 2015 by 467.5 billion yuan.
These three factors suggest China’s economy might have contracted last year.
Many observers say the three factors are no longer as important as they once were because they measure a manufacturing-based economy and China is transitioning to a services-based one. Premier Li’s State Council, stung by charges of low growth suggested by the three factors, in November proposed a new three-factor index composed of employment, personal income, and environmental improvement.
The new index is faulty and not easy to calculate. For one thing, the Ministry of Human Resources and Social Security stopped releasing disappointing employment data showing growth in low single digits. The personal income figure is illuminating, but the environmental-improvement factor is irrelevant to output, except perhaps in an inverse-relationship way. As one commentator, Leo Wong of CNI Securities Group, noted, the new gauge presumes manufacturing “has absolutely no effect” on the Chinese economy.
In fact, China still has a manufacturing sector, which appears to account for about 40% of the economy, and due to severe problems it is getting smaller. NBS reported that industrial output for the first 11 months of last year was up 6.1%, but that number is obviously far too high. The Purchasing Managers’ Index calculated by the Markit Economics research firm shows the manufacturing sector has now contracted for ten straight months on a month-on-month basis. The official PMI, which focuses on state industry, shows contraction since August.
Price data confirms the sector is shrinking. The Producer Price Index, showing factory-gate prices, was down 5.2% for 2015. December, when the index fell 5.9%, was the 46th-straight month of decline.
Industry after industry shows falling output. Take the bellwether production of crude steel, for instance. Steel was off 2.2% for the first eleven months of last year.
Many observers say manufacturing no longer matters because services, which now account for about half of the economy, are booming. That may not be the case, however. For one thing, Beijing’s draconian measures to rescue the stock markets crushed financial services beginning in July.
For instance, Chinese officials halted initial public offerings. But that was not the worst of it. Acting in a heavy-handed manner, they also prohibited institutions from selling and criminalized some forms of trading. As a result, volume in China’s stock-index futures market, once the world’s largest, dropped 99% in the June-to-September period. Stock trading volume fell by around 70% then.
NBS reports that the services sector increased 8.4% in Q3, the same percentage as the increase in services for the first half of the year, but that defies what is easily observable. Early last year, just about everyone said financial services were propelling growth. So, if they were right then, financial services has to be dragging down GDP now.
There are exciting things happening in China in the services sector and long-term they can remake the economy, but in 2015 they were not enough to overcome the collapse of the equity markets.
Then there is the consumption story. According to analysts, the Chinese people consumed more and propelled the economy, making up for declines in investment. Perhaps that can occur in the long-term, but it did not happen in 2015.
Consumption is at best mixed. Large sales increases reported by online retailers like
And if retail sales are increasing at a double-digit pace—NBS reported retail sales of consumer goods for the first 11 months soared 10.6%—then why is there almost no price pressure? For 2015, the Consumer Price Index rose 1.4%, well below the government’s 3.0% target. Strip out food costs—up 2.3% for the year—and the index is even flatter.
There are three disturbing signs for the economy as a whole. First, the China Beige Book, the broad survey that has shown robust growth for years, is now flashing red, highlighting across-the-board weakness and “particularly disturbing” trends.
Second, two-way trade of $3.96 trillion for the year was down 8.0%, widely missing Beijing’s 6.0% growth target. Imports, which reflect trends in both investment and consumption, were down 14.1% last year.
China Customs blamed declining commodity prices for the decrease in imports, but the import number would have been far worse if Beijing had not been taking advantage of low oil prices to fill its strategic reserve and if parties were not using fictitious trade invoicing to smuggle money in and out of the country. The “fake invoicing” through Hong Kong was particularly evident last month. China’s exports to the territory were up 10.8% and imports from there skyrocketed 65.0%.
Third, the No. 1 tell that China had a bad 2015 is country-wide deflation. In Q3, nominal GDP growth of 6.2% was less than the officially reported real growth of 6.9%. Countries with robust economies do not at the same time experience falling prices, at least not in our galaxy.
China, on planet Earth, could not have grown anywhere near 7% last year.
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