China data watch: Stabilization by year-end

Like many of us, Fed economists have questioned the reliability of China's GDP data. A 2013 Economic Letter from the San Francisco Fed compared the official GDP data with several alternative indicators constructed from high-frequency data published by China and by its trading partners. The conclusion was fairly benign: there was no major issue with China's official GDP figures. The same approach, if repeated today, might lead to a different conclusion and show a widening gap between headline GDP growth and high-frequency data. However, the reason for this is legitimate and has to do with the fast rebalancing towards services and consumption. The latter has partly offset the pain of hard-landing in investment which tends to be overrepresented in many monthly indicators.

In any case, the Fed wants to see confirmation that China is not landing hard, and China's growth can stabilise only if investment and industrial growth stabilises. Even if the headline real GDP growth continues to show little volatility, main monthly releases including industrial production (IP), fixed asset investment (FAI) and retail sales (RS), can still provide a good indication about the direction of the economy. Manufacturing PMI reports may be another reference point, but given their close correlation with IP growth, their value-added is only in their timeliness. 

China's activity growth is expected to stabilise before the year-end, mostly thanks to a bigger push on credit-backed infrastructure investment. Bank loan growth, one key leading indicator, has been accelerating since mid-year and infrastructure investment growth picked up from 15.5% yoy in July to 20.8% yoy in August. Further acceleration in infrastructure spending is expected in the coming months, which should be able to steady FAI and turn around IP growth (as well as the official manufacturing PMI). 

"Our outlook for China's growth supports a December liftoff", notes Societe Generale.