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China’s Economic Data Seen Overstated – Analysis

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By Michael Lelyveld

China’s latest energy data has renewed doubts about the government’s economic growth claims, despite statements of confidence in a stable performance this year.

On July 27, the National Energy Administration (NEA) said that China’s total energy consumption in the first half of 2015 rose by only 0.7 percent from a year earlier, dropping from an official 2.2-percent growth rate for all of 2014.

The slack energy numbers contrasted sharply with the government’s estimate of gross domestic product (GDP) growth, which held steady at 7 percent for the second quarter and first half, despite widespread concerns of weakening.

But nearly all of China’s recent energy and economic data suggest that the government has overstated the growth of GDP.

“I don’t think the reported energy use growth is consistent with the GDP number of 7 percent for the first half,” said Gary Hufbauer, senior fellow at the Peterson Institute for International Economics in Washington.

“It’s consistent with maybe 4 percent at best. There’s something wrong here,” Hufbauer said.

Economists often look at electricity consumption as a surrogate measure of real economic activity, but the NEA reports of a nearly negligible 0.6-percent increase in first- half power use have only added to doubts.

The estimate was less than half of the 1.3-percent preliminary figure that the NEA announced earlier last month, and that growth rate was the lowest in 30 years, the China Electricity Council (CEC) said on July 21.

While 19 provinces recorded higher power consumption rates than the national average, usage fell in nine, the official Xinhua news agency reported.

Electricity use also dipped 0.5 percent in secondary industry, or manufacturing, marking the first decline in five years, the CEC said.

Usage rose 2.1 percent in light industry but it fell 0.9 percent in heavy industry, which accounted for nearly 60 percent of China’s total power consumption, according to official figures reported by Reuters.

Official reports cited stronger performance by the tertiary industry, or service sector, where power use climbed 8.8 percent from a year earlier in the first half.

But the service sector used only about 12 percent of China’s electricity.

Despite the small share, the service sector has had an outsized effect on economic growth, according to National Bureau of Statistics (NBS) data, expanding 8.4 percent in the first half and accounting for 49.5 percent of GDP.

But whether the service sector actually generated half of China’s GDP using one-eighth of the electricity remains to be seen.

China’s power data suggests a continued decline in the economy rather than the consistency of the 7-percent GDP growth rate reported for both the first and second quarters.

“Electricity data has long been the barometer of (the) economy,” said Xinhua, quoting experts as saying that the small increase in usage is “the indicator that China has entered a phase of slower economic development.”

China’s power use rose a scant 0.8 percent in the first quarter. That was down from a 3.8-percent increase in all of 2014, when GDP expanded by 7.4 percent at the slowest pace in24 years, according to official reports.

Coal, crude oil and gas

Other energy figures for the first half also suggest lower-than-reported economic growth.

Production of coal, which provides nearly two-thirds of China’s primary energy, was down 5.8 percent, NBS reported, while thermal coal imports plunged 44 percent, Platts energy news service said.

China’s implied demand for crude oil rose 5.7 percent in the first half, Reuters estimated, and imports climbed 7.5 percent, according to Bloomberg News.

But the increase in imports has been linked to enlargement of the country’s strategic oil reserve rather than robust demand.

China’s consumption of refined products increased only 3.2 percent, the National Development and Reform Commission (NDRC) reported. Natural gas use rose just 2.1 percent, it said.

The widening gap between growth in energy use and GDP can be explained by ever-improving energy efficiency, the government argues.

Last year, China reduced its “energy intensity” index, which measures energy use per unit of GDP, by a whopping 4.8 percent, exceeding the annual target of 3.9 percent, the NBS said.

In the first quarter, the NBS estimated an even greater efficiency improvement of 5.6 percent as the government pursued its “war against pollution.”

The comparison of first-half energy and GDP growth rates suggests that claims of even greater efficiency gains are in the works.

But Hufbauer said that annual improvements in energy intensity of about 2 percent would be “as good as one could expect.”

“The question is how are they getting these high numbers,” said Hufbauer. “There’s a big question mark here.”

“I’m inclined to think there’s a fair amount of inflation in the GDP statistics,” he said.

Trade figures fall

Declining trade figures also raise suspicions about GDP growth, which has been bolstered for years by double-digit trade gains.

First-half trade fell 6.9 percent from a year earlier, worsening from a 6-percent drop in the first quarter, the General Administration of Customs (GAC) said.

Exports through June edged up only 0.9 percent while imports slid 15.5 percent in another sign of limp domestic demand.

Trade results for July, released over the weekend, have extended the trends.

Exports for the month fell by an unexpected 8.9 percent from a year before, dragging seven-month figures into negative territory with an 0.9-percent decline.

July imports were down 8.6 percent as year-to-date value in yuan terms lost 14.6 percent, GAC reported.

“Exports are no longer an engine for China growth,” Bank of Communications economist Liu Xuezhi told Bloomberg. “No matter what the government does, it’s just impossible to see strong export growth as in the past.”

Reports of lower industrial profits in June and negative purchasing managers’ surveys in July have added to shaky signals from the stock market.

But a larger question may loom over China’s GDP readings.

Unlike many other economies, China has kept GDP growth relatively high while inflation has stayed low in recent years.

In the first half, the increase in the country’s consumer price index (CPI) stood at just 1.3 percent while the producer price index (PPI) dipped 4.6 percent.

Inflation results for July, released Sunday, suggest more of the same in the second half.

While the CPI crept up to 1.6 percent on higher pork prices, the PPI sank 5.4 percent, marking 41 months of decline in a row, the NBS said.

Economists have long cited China’s vast industrial overcapacity for the drops in producer, or wholesale, prices, in spite of economic growth.

But with the weakening of actual production, that argument may be harder to make.

In the first half, China’s industrial value-added output, its measure of production, rose 6.3 percent, down from an 8.3-percent growth rate in 2014.

Production of major construction-related industries like steel and cement fell by margins of 1.3 and 5.3 percent respectively.

While official GDP growth has remained relatively strong and constant at the government’s target level from quarter to quarter, CPI has lagged far below this year’s target of 3 percent.

“It’s very exceptional to have that combination,” Hufbauer said.

“It gets harder and harder to believe the GDP number,” he said.

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