The “Official” pace of economic expansion in China in 3Q once again fell short of expectations, dropping to its lowest level in 30 years. Growth equaled the lower limit of the range set by the government at 6.0 – 6.5%.
In order to maintain the growth rate in 4Q in the target range the government is likely to resort to broad monetary easing – cutting key interest rate to reduce broad borrowing costs or to inflate the aggregate expenditures through increased fiscal spending of municipal governments at the end of the year.
The second option is more likely given the opposing inflation trend (+ 3.0% YoY in September). The main corollary from the figures released on Friday is that China needs the trade deal badly, so the chances of a positive outcome of the talks are growing.
China’s GDP was 6.0% in the third quarter, contrary to the forecast of 6.1%. In the second quarter, output increased by 6.2%, and in general, we are interested not the trend, but in the pace of decline. Being a key link in world trade, the slowdown in China indicates a further decline in the foreign demand, which cannot but affect the policy of other national central banks. Looking under the hood of the report we can see that the negative trend was most actively developing in the export-oriented manufacturing sector.
The subtleties of calculating GDP by the Chinese government make legitimate doubts about the validity of official figures. But I note that this is not a hoax or manipulation, but only subtleties. So, for example, due to the predominance of administrative elements of economic management, the government was tempted and able to generate growth through the accumulation of fixed capital:
For comparison, in the United States, the share of investments in fixed assets is below 20% of GDP and their large share amounts to private enterprises (86%). I think without command methods and the expedient activity of state-owned enterprises, the share of fixed capital formation in GDP would be lower in China.
And we are interested in this term because consumption of fixed capital (depreciation) also falls on state-owned enterprises and it is known from the formula for calculating GDP by income that depreciation is included with the + sign. And while China’s private enterprises are generally allowed to calculate depreciation primarily in a straight-line method, state-owned enterprises are more flexible in choosing a method so that the contribution of depreciation to GDP can be easily inflated to meet the government targets.
At a briefing after the release of report, the head of China Statistical Agency said that some part of the municipal bonds for special purposes, the issue of which was planned for 2020, will be released this year. As you can see, the government stubbornly declines to use monetary stimulus, possibly making a lesson from running out of monetary ammo ECB and Bank of Japan. Among other hypotheses that may inhibit PBOC from monetary expansion, inflation is put forward, however, it can be argued that it mainly falls on volatile food products (+ 8.4%) and related to temporary supply deficits:
It is worth noting that the price of pork rose in September by 69% (in annual terms) and yesterday it was reported that China bought a record weekly volume of pork from the United States.
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