Behind the numbers

From "Thank Heaven for the Weak Chinese Consumer" by Jonathan Anderson, UBS head of Asia-Pacific Economics, August 16

In technical terms there’s nothing "wrong" with the consumption statistics, in the sense that the authorities have arguably done a decent job capturing the kinds of transactions that are supposed to go into the consumption accounts. However, in economic terms the numbers are very misleading indeed, and we suggest investors might be better off ignoring them. Why? Because when we talk about Chinese households’ contribution to domestic demand and overall growth, it’s not consumption per se that we want to measure – rather, it’s total spending by consumers. Aren’t these generally the same thing? Not in the least … Consumption data only include spending on non-durable goods and current flow services; in particular, they don’t capture purchases of residential housing, which are placed in the investment accounts. But anyone who follows China will know that it is mostly the housing and property boom of the past decade that drove growth to such dizzying heights … It’s clear that there has been no slowdown at all in overall expenditure; households accounted for nearly 50% of GDP in final spending a decade ago, and nearly 50% of GDP today. Chinese demand isn’t weak at all; in fact, consumers have been comfortably keeping pace with the supercharged double-digit growth story the entire way through. The only thing that happened was a shift in composition, as households began spending less on non-durable goods and more on durables such as homes, autos and appliances.

From "The China Data Diviner: PIGS and PIIGS, part 2" by Paul Cavey, Macquarie China economist, August 9

This month we make some adjustments to our inflation and trade forecasts for 2011, but our outlook for the rest of 2010 is unchanged. GDP growth should slow toward 8% by the end of 2010, pulled down by softer growth of construction and heavy industrial output, the result of slower property sales and the government’s crackdown on energy intensive industries respectively. For the moment the y/y rise in CPI inflation is picking up. However, this is partly because of rising pig prices, which should stabilize after September. With softening PPI suggesting real inflationary pressures are muted, CPI inflation should ease into 4Q10. This backdrop of slowing growth should keep policy on hold for the rest of 2010. The risk here is not so much CPI, but the euro and property sales. The rebound of both the euro and global risk appetite suggest that the liquidity that drained out of China in June is now coming back in again. As a result, unless the PBoC wants to see breakout in credit growth, it will have to start sterilizing again, first through central bank bills, but ultimately also hikes in the reserve requirement ratio. For property, the question is whether the jump in housing sales seen in the last couple of weeks develops into something stronger. This isn’t our base case: One big developer we saw recently attributed the recent rise in property sales to new launches rather than the market finding new legs. However, rather than CPI, it is a sustained pick-up in property sales that would be the pre-condition for a new round of tightening.