China’s official statistics and “independent experts” who repeat
them are often frustrating. When the Communist Party is tense, they’re
outrageous. For weeks, the party telegraphed plans for Q2 to start a magical economic
recovery reflecting Xi Jinping’s marvelous leadership. The results will be
widely accepted at face value and parroted interminably. They’re not
A core reason to trumpet China’s rise is data created by
people who every quarter offer variations on this:
In the first half of 2020, faced with serious challenges posed by the covid-19 outbreak and a complex and fast-changing environment both at home and abroad, under the strong leadership of the Central Committee of the Communist Party of China with comrade Xi Jinping as the core, the whole nation coordinated efforts to advance both the prevention and control of the epidemic and the economic and social development, firmly implemented the decisions and arrangements made by the Central Committee and the State Council, sustained improvement was made in epidemic prevention and control, and the resumption of work, production, business and market was advanced at an accelerated pace.
The commitment to accuracy leaps off the page. Of course China reported 3.2 percent GDP growth in Q2 — the speed is needed to ensure Xi’s regime meets its targets. The purported recovery is led by industry. In May, industrial value added was said to rise 4.4 percent over May 2019. Private firms led the way in May and the first six months.
I’m ignoring June because there’s a problem at the end of May. On
May 27, the National Bureau of Statistics said 67.4 percent of surveyed firms
were at 80 percent or more of “normal” production. So nearly
one-third saw at least a 20 percent decline. This is hard to reconcile with
on-year growth. Possibilities:
- Normal production is a high bar implying double-digit on-year expansion. Unlikely for reasons both of survey design and standard confidence-building efforts.
- The firms above 80 percent were far above, averaging 120 percent of normal. This is hard to imagine, given depressed demand in China (below) and globally.
- Small firms operated below normal while firms with more weight outperformed. But private firms were said to lead and are generally smaller.
The tension predates May — official surveys on enterprise reopening and capacity
have clashed with output results. Finally, June producer price deflation
intensified, which is odd if industry boomed late in the quarter.
Services have the same issue. At the end of June, 10 percent of services firms hadn’t even restarted, making
no contribution at all. Obviously more firms were entirely closed through May
and April. Yet services somehow expanded in Q2. It’s very difficult
arithmetically to generate on-year growth when a chunk of firms have gone to
More: Fixed asset investment (FAI) improved to a 3.1 percent drop
in the first half from -6.3 percent the first five months. Through May 2019 FAI
was 21.75 trillion yuan and through June it was 29.91 trillion yuan — 8.16 trillion yuan in June 2019
alone. The June FAI number implied by the May and June 2020 announcements
(links above) is 8.24 trillion yuan. How does a 1 percent gain in June
2020 cut five months of FAI decline in half?
A 3.1 percent slip in FAI would, along with an 11.6 percent
first-half plunge in retail sales (standing in for consumption), account for by
far the two largest components of GDP. Yet GDP falls only 1.6 percent in the
first six months. China rushes to publish data which never hold together.
Retail sales supposedly improved sharply in Q2, to only a 3.9
percent decline. But core consumer price inflation was very low and slowing, rather than picking up due to
strengthening demand. Cash in circulation slowed from February to June and deposit growth accelerated from February to
May, leaving less money for consumer spending.
Autos comprise over 10 percent of retail sales. There are multiple
indicators but passenger cars best reflect consumer sentiment. They not
only fell 23 percent in the first half of the year,
they fell in June.
Beijing actually deserves praise for policies which also don’t
support a Q2 rebound. Narrow money M1 growth was reasonable compared to
in the US. Loan growth was excessive in 2019 but has accelerated only
mildly to 13.3 percent in the first six months. China is not racking
up debt, but also not jump-starting the economy with borrowing.
In 1998, the Chinese economy was under great strain and the government lied about it. In 2009, official data never showed a serious problem yet China conducted stimulus equivalent to 28 percent of GDP. But this time they’re telling the truth.
One change since 1998 and 2009: It’s much scarier to cross the party line. If you do business in China, better correct your “mistakes” very quickly. That’s one reason you’ll hear so much about how great the People’s Republic is doing.