Chinese GDP data meets dubious reception

The news this week that China’s economy grew at 6.9 per cent in the third quarter, according to official government calculations, was greeted with the usual guffaws of disbelief by in-the-know analysts.

China’s broad measure of economic health has long been discredited.

The prime minister Li Keqiang famously told the US ambassador to China in 2007 that the GDP numbers were “man-made”, and he preferred to track three other measures to gauge China’s economic health – electricity demand, rail freight and bank loans.

Even if it was credible, the rate of GDP growth would be the slowest quarterly expansion since the financial crisis seven years ago, and below the 7 per cent growth rate officially recorded for the first half of the year.

But the broad economic picture is probably worse, perhaps much worse.

Danny Gabay, a former Bank of England and JP Morgan economist, and co-founder of the independent macroeconomics outfit Fathom Consulting, is among the most cynical China observers.

He says: “Quite frankly we don’t believe [GDP data] at all.

“It’s not just that they come in close to the target, which is pre-set, but they are produced remarkably quickly and are rarely revised.”

Fathom Consulting uses energy consumption and other domestic measures to generate its own “China Momentum Indicator”, which estimates that China’s annual economic growth may have slowed to about 3 per cent in the latest quarter.

Mr Gabay notes that the gloomier China story was foreshadowed by the collapse in commodities prices, led by oil, over the past year-and-a-half.

But the difficulty with China’s GDP data is not just that they are manufactured by the government but that all such aggregating data are both inherently faulty and misleading about what is actually happening in something as complex as a large economy. Yet they often set the tone for financial and commodity markets.

In reality, there are a wide variety of factors at work on China’s energy sector, each of which can have profound consequences for its suppliers.

The energy sector is driven not just by overall growth in demand but by the government’s drive to change the mix so that it decreases the share of coal and other fossil fuels to meet its international commitments on energy intensity (energy as a percentage of GDP) and carbon emissions.

But oil demand is driven not only by industrial and household growth but by the burgeoning middle class demand for road transport. Even though its economy had already begun to slow after 2010, momentum meant that it surpassed the US in 2013 as the world’s largest importer of oil.

Last year China accounted for a whopping 43 per cent of world oil demand growth, importing about 6.1 million barrels per day.

That is forecast by the US energy information agency to slow to just a 23 per cent share of the world’s growth this year.

The latest data on oil consumption in China showed “apparent demand” for oil and oil products fell by 230,000 bpd to an 11-month low of 10.15 million bpd. But that followed a record level of 10.64 million bpd in August.

Stepping back and looking at the whole year to date, however, shows that oil imports this year have grown at a healthy 8.7 per cent to nearly 6.7 million bpd, with a significant part of that thanks to the addition this year of hundreds of millions of barrels of new strategic storage facilities which had to be filled up.

The next move in demand in China will be determined to a large degree by the details of the government’s efforts to boost the economy, and whether those will be focused on boosting consumer demand.

Improvements to transport infrastructure and efforts to help ease access to and use of road transport could mean that oil demand in China will continue to grow at rates that run ahead of the broader economy.

China has undertaken the massive task of “rebalancing” its economy so that it is driven more by development of its internal markets and the expansion of consumption at home.

As with other measures of China’s economy, it is difficult to gauge whether it is achieving results. Mr Gabay is also doubtful on that front.

“It has achieved zero rebalancing,” he maintains. But others disagree and see evidence that consumers are spending at the retail level, even if this hasn’t yet shown through the bigger ticket items, including cars.

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