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Alternatives to China’s 3Q GDP paint a stabilizing economy

Tourists are taking selfies with the Oriental Pearl tower onTourists are taking selfies with the Oriental Pearl tower on
Services, such as tourism, are supporting the overall GDP numbers.Photograph by Zhang Peng — LightRocket via Getty Images

It should not be surprising that China’s government said today third quarter gross domestic product rose by 6.9%, just a hair below the stated first and second quarter growth rates of 7.0%. It was the lowest quarterly growth rate since 2009, but still, considering that many on Wall Street are worried about the potential for a Chinese crash, the figure points to stability.

But should the latest GDP growth figure be trusted?

China’s GDP is widely considered to be managed. The figures are deeply political—the Communist Party still gives great weight to cadres economic performance when considering promotions— so many analysts who study China are paying attention to other figures that create a better portrait of an economy facing an industrial recession.

Those figures paint a more nuanced, and fairly stable, picture of what’s happening across China’s bigger economy.

One firm, Capital Economics, has created an index of economic indicators that’s similar to one used by Chinese Premier Li Keqiang, who said he follows electricity production, freight weight, and bank-loan growth in lieu of GDP figures, according to a U.S. diplomatic cable made public by Wikileaks in 2010.

The China Activity Proxy, which follows similar data to Li’s index and was actually compiled before news of the Li index was leaked, recorded GDP growth closer to 4.5% in the third quarter. That may look shocking, but the absolute figure is less important than the trend. And what Capital Economics’s China economist Julian Evans-Pritchard notes is that after growth collapsed in the first quarter to 4% growth from 5.5% in the last quarter of 2014, it has come back to at least stabilize over the past couple quarters, leading him to deem China’s monetary and fiscal stimulus this year—the central bank has cut interest rates to record lows, reduced banks’ reserve requirements, and pushed forward infrastructure projects—a success in keeping China’s economy from stumbling hard.

“While the pace of growth is clearly exaggerated on the official figures, we do have reason to believe that growth was broadly stable between Q2 and Q3,” Evans-Pritchard wrote today after the GDP release. “Overall, today’s data suggest that while the official GDP figures continue to overstate the actual pace of growth in China by a significant margin, underlying conditions are subdued but stable.”

There are other recent data to look to besides today’s GDP release that offer more insight into what’s happening in China.

One is retail sales, which are keeping China’s economy from potentially crashing to very low growth. Retail sales in September in China grew by 10.9% in nominal terms. The services sectors generally, which constitute nearly 50% of China’s GDP, grew by 8.4% in the third quarter as the industry group that includes manufacturing slowed to a rate of only 6%. GDP in some of the coastal provinces during the first half of this year rose around 10% as Chinese consumers continue to spend and travel; at the same time, inland provinces heavy in mining and metals were going through recession.

Another proxy for the Chinese economy is South Korean exports. After Australia, South Korea sends a larger percentage of its outbound products to China than any other country. The data are especially useful because the exported products—cars, integrated circuits, and refined oil— come from a broad range of industries. Although the massive explosion at the port of Tianjin in August has made interpretation of the shorter-term data difficult, overall Korean exports had their weakest September in five years this year, according to Trade Ministry data, and this chart below shows that the trend is, if anything, negative.

Korea's exports to China have been on a downward trend this year.
South Korea’s exports to China have been on a downward trend this year. Source: South Korea Ministry of Trade
Korean Ministry of Trade

Not falling off a cliff, but still not great—similar to today’s GDP growth figure taken at face value.

One shouldn’t expect the folly of tracking China’s GDP growth figures to change anytime soon. China’s government is set to release a five-year plan next year, the 13th the Communist Party has issued. Sources leaked news to China’s Economic Observer that the new annual GDP growth target would fall to 6.5% from the current 7%.