China reports GDP numbers for Q2 tonight at 10PM EST. We will be covering the data and providing analysis after the GDP numbers come out. Although, we do not usually cover macro numbers so closely this is a big report (and far more important than every word a Fed President states). The bad news is that nearly everyone expects really poor numbers. The good news is that because expectations are so low anything positive will be a welcome relief. Furthermore, for the bears if the numbers are good one can always still go back to the claim that the numbers are manipulated.
Update 10:02PM EST: *CHINA 2Q GDP RISES 7.5%; ESTIMATE 7.5%. Some are reporting 7.6% as the final number, unclear why there is a discrepancy, but the number either matched or slightly beat expectations. However, some other important numbers were not great, China June industrial output came in at 8.9% y/y, vs. +9.1% forecast, China Fixed asset investment for June: 20.1% (vs. +20.3% expected). But China June retail sales: 13.3% y/y (vs. +12.9% forecast). All Asian indices go green except Malaysia.
China GDP Estimates and Problems
Famous China expert, author of The Great Rebalancing: Trade, Conflict, and the Perilous Road Ahead for the World Economy and The Volatility Machine: Emerging Economics and the Threat of Financial Collapse, Michael Pettis wrote in a recent newsletter:
Most analysts have lowered their forecasts substantially in the past two years, and especially in the past month, but they are still deluding themselves about longer-term growth prospects. One of the most enlightened, Capital Research, had this to say in their latest news report:
We are now formally including 2015 in our detailed economic forecasts for the first time and have pencilled in GDP growth of 6.5%, a further slowdown from the 7-7.5% growth we expect this year and next. In our view, this is a relatively optimistic scenario. Crucially, our forecast is based on the assumption that the government can slow credit growth without causing significant dislocation to the economy.
Although I usually find myself in agreement with Capital Research, I think even they are way too optimistic. They are expecting growth over the next three years to exceed 7% annually on average, while most of their competitors are expecting growth rates closer to 8%, but I just don’t see how we can grow at either rate without running the risk of a serious debt crisis before the end of the period. As it is we are having a hard enough time understanding what current growth rates really are.
Furthermore, Pettis states:
Last year’s GDP growth clocked in at 7.9%, although a lot of analysts believe it may have been closer to 5.5%, and if power consumption year to date is already much lower than it was last year, unless there has been a major – and hard to detect – improvement in energy efficiency it is hard for me to imagine why growth this year and next year should even match last year. My friend Kenneth Austin at the US Treasury tells me that China has misallocated energy resources to the extent that it’s GDP/energy consumption ratio is very low, so that if China begins to allocate resources better, we can expect total energy consumption growth to slow relative to GDP, and he is probably right, but it seems to me that an improvement in the energy allocation process, if indeed there has been any, couldn’t change the relationship between growth and energy consumption at nearly the pace implied by the numbers.
So according to Pettis no one really does know! But here is some data from SocGen and some interesting comments from a new Goldman report.
SocGen China Economist, Wei Yao, has revised down the outlook for Q2 GDP to 7.4% from the previous estimate of 7.6%. Our full year estimate for 2014, moreover, remains low at just over 7% compared to consensus of close to 8% and we see little scope for upside surprises as Chinese policymakers continue their tough love stance on taming credit. SocGen Believes that Chinese policymakers still have the ability to steer clear of a hard landing; however, should they give into the temptation of an easy monetary fix to higher growth rates, then we believe that hard landing risks would correspondingly increase under the burden of a shadow banking system that could ultimately turn even uglier.
For China, it really is a case of a stitch in time saves nine! MARKET ISSUES: While the consensus of economists still lags, markets are adjusting to weaker growth prospects for China. We believe this adjustment to be structural as we see Chinese growth slowing to just 6% in five years time and 4-5% by the end of the current decade.
Goldman Equity Research notes in a new report this evening:
The Shibor surge in June has already negatively impacted M2/GDP growth and corporate NPLs, mainly as discount bill loans’ informal securitization through banks’ interbank channels will slow down.
Banks believe NPL balance will modestly rise, given economic slowdown and rebalancing, the challenging corporate earnings outlook especially in sectors with over-capacity and SMEs. Also, smaller banks with high growth in interbank assets and informal interbank securitization will likely slow down or reduce their interbank exposure (e.g. Minsheng, Industrial Bank).
Meanwhile, Chinese policymakers are stating that they may tolerate growth in the 6.5% to 7% range.)