China’s Unexpectedly Strong Growth Isn't What it Seems
China Is First Major Economy to Return to Growth Since Coronavirus Pandemic
The Wall Street Journal reports China Is First Major Economy to Return to Growth Since Coronavirus Pandemic
On Thursday, China said its economy grew 3.2% from a year earlier in the second quarter, as authorities benefited from an aggressive campaign to eradicate the virus within its borders.
In sequential terms, China’s second-quarter growth in gross domestic product represented a 11.5% rebound from the first three months of the year, according to data released by Beijing’s National Bureau of Statistics. For the entire first six months of the year, China’s economy contracted just 1.6% when compared with the first half of 2019.The growth figure for the second quarter beat a median estimate from economists for 2.6% growth and was at the top end of an unusually wide range of forecasts, from a contraction of 3.1% to growth of 3.5%. It followed a historic 6.8% contraction in the first three months of the year, when Beijing shut down the country in late January as the coronavirus spread across China from the central city of Wuhan.
Not What It Seems
Michael Pettis at China Financial Markets has a different take in a Tweet Thread.
- Markets drop sharply on China’s “unexpectedly” strong growth data earlier today. Like several other analysts, I full expected the data to come in above expectations, but I was completely wrong-footed by the market reaction.
- The fact that the markets dropped so ferociously on “good” news may be important, perhaps marking a long-overdue change in the way analysts interpret Chinese data. Instead of celebrating a strong supply-side recovery, everyone seems to have focused instead on the bad demand-side numbers.
- Retail sales were down by 3.9% for the quarter. Real disposable income was down 1.3%, and there is a great deal of evidence that its decline was asymmetrically distributed: richer households actually saw an increase in income, whereas for the rest, the poorer, the greater the decline.
- As an aside, a senior European manufacturer told me today that while car sales in China have been stronger than expected, purchases of luxury cars have soared, perhaps reflecting one-off response to Covid-19, while purchases of cheaper cars have plummeted, and seem unlikely to come back.
- Covid-19 is a demand-side shock, and I think there is growing recognition that China’s misguided supply-side response must mean either a surging trade surplus (which we are already seeing and which is bad news for the rest of the world, assuming...
- ...it is allowed to continue) or surging domestic investment, which mainly means non-productive investment and, consequently, surging debt.
- I was particularly intrigued by Jamil Anderlini’s claim (below) that “investment by private companies fell by 7.3 per cent”.
- This is pretty bad news. It means that the share of investment driven by either state-sector spending on non-productive infrastructure or investment in real estate development is rising much more rapidly than I expected.
Behind the Recovery, China’s Economy is Wobbling
Point 7 above refers to the Financial Times article Behind the Recovery, China’s Economy is Wobbling.
China's allegedly solid rebound took a Herculean effort and more state debt, the same tools as always. Anderlini reports that investment by state-owned enterprises in the first half of the year rose by 2.1%, while investment by private companies fell by 7.3 %.
His conclusion is amusing.
- A decade ago, some economists liked to describe the Chinese economy as a bicycle that needed to maintain a certain speed or it would tip over and crash.
- Today it is more like a bicycle laden with enormous boxes of debt, ridden by a drunk and with strategic competitors such as the US trying to knock it over.
It is not just China. So, let's correct point 2 so that it is more accurate.
The global economy is like a bicycle laden with enormous boxes of debt ridden by drunken central bankers hoping to stuff more debt into the boxes despite the debt deflation consequences of their actions.