China is on the road to recovery. Or maybe it isn’t, at least not for some time, say the contradictory reports on the world’s second-largest economy.
The latest GDP figures, showing a growth rate in the third quarter of 6.9%, down from 7% in the second quarter, have done little to lay this particular debate to rest.
Some analysts argue Beijing is stuck in a rut, unable to wean itself off the colossal volumes of investment that it needs to keep its industrial turbines turning. Others spy a rising middle class with a strong appetite for services. They argue China will soon be rebalancing away from smoke-stack industries to employ millions more people in an expanded health service, transport system and financial services.
What they all agree on is that official figures from Beijing’s economic ministries should be treated with scepticism.
Independent analysts at Lombard Street Research (LSR) stand firmly in the camp supporting China’s shift to a more balanced economy, with industrial businesses less likely to soak up investment funds, allowing more funds for consumption.
But for several years LSR has been one of the most sceptical users of official data. To illustrate the point, earlier this year when the official growth rate was 7% – the government target rate of growth – LSR was arguing it was below 4%.
Its analysis depended on an interpretation of figures showing that industrial output had slowed more dramatically than official estimates and the sector’s profitability had all but evaporated.
Since then GDP has recovered, it says, with services in the vanguard. That means a rebalancing is running in tandem with a recovering economy, albeit with many bumps in the road and a warning to investors to steer clear of Shanghai’s volatile stock market.
Analysts at Fathom Consulting present a gloomier outlook. They are similarly sceptical of the official figures but far from interpreting the last two years as a rollercoaster of slumps and recovery, they describe a long decline with little upturn in sight.
In a recent note it said: “Many now widely dismiss China’s official GDP statistics as little more than propaganda, and growth forecasts are slowly drifting closer to our own view. We have warned for years that China was at risk of a hard landing, and our China momentum indicator now suggests that growth is closer to 3% per annum.”
Nancy Curtin, the chief investment officer at Close Brothers Asset Management, is in the rebalancing camp.
She said: “The service cogs are still improving and we can’t be too negative about the medium-term prospects of an economy with both fiscal and monetary tools at its disposal, as well as a middle class taking a greater share of the economic pie.
“For now, policymakers will no doubt attempt to mitigate some of the pressure and soothe the markets, and in the longer term eyes will be on other elements of the service sector to see if it can provide a leg up.”
The refusal of the US Federal Reserve to increase interest rates while China’s slowdown feeds market instability will give Beijing policymakers breathing space. As Curtin said, the question will be how China uses that breathing space.
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