Business Report - As China tries to avoid a hard landing, it's difficult to get fired up over GDP data

As China tries to avoid a hard landing, it's difficult to get fired up over GDP data

It's really hard to get excited about the report on China's gross domestic product.

For one thing, even if Chinese growth slowed in the third quarter, it won't indicate whether Asia's second-biggest economy is avoiding a hard landing.

For another, some question the data's credibility.

"Treating this gross domestic product (GDP) figure as a hard number rather than a highly manipulated political statement is a big mistake," says Carl Weinberg, the chief global economist at High Frequency Economics in New York.

China didn't help things by delaying the report's release from last week until this week. While statisticians blamed disruptions caused by the week-long holiday that began on October 1, some observers drew other conclusions.

"I think they're still trying to figure out how to make the data consistent," Andy Xie, the Hong Kong-based chief Asia economist at Morgan Stanley, says. "The government doesn't want to raise interest rates, so you would expect them to report a number that is not very high."

China has been claiming that austerity measures - including restraints on credit and restrictions on investment projects - are working. Releasing GDP figures at odds with those pronouncements would dent the reputation of China's leadership and economic officials.

Measuring any economy is a daunting task, never mind one as populous, diverse and underdeveloped as China's. Yet, even if China reports that GDP rose the 8.9 percent in the third quarter expected by economists surveyed by Bloomberg News - versus 9.6 percent in the second - the risk of overheating remains.

It hardly helps that some economists think China is getting a second wind.

"We think the Chinese economy is about to bounce back again," says Tao Dong, an economist at Credit Suisse First Boston in Hong Kong. Lending curbs, Tao says, merely have companies borrowing elsewhere; he estimates a black-lending market worth as much as 140 billion yuan (R106 billion) has popped up in the last two months.

Some observers are putting more faith in a less-politically charged economic indicator: consumer prices. "The GDP numbers may vary any way politicians wish, but we will not believe aggregate demand is coming back in line with aggregate supply until the price trend stabilises," Weinberg says.

For all China's efforts, its economy still suffers from too much money chasing too few goods. Money supply has slowed, but it's still growing at 13.9 percent compared with a year earlier - that at a time when China's inflation rate is expected to advance 5.3 percent in September, its highest since February 1997.

China continues to import inflation. Pegged at 8.3 to the US dollar, China's undervalued currency isn't much of a defence against crude oil prices that rose 75 percent over the past 12 months.

While China needs to avoid overheating, it also must grow rapidly enough to lift hundreds of millions of people out of poverty and help banks rid themselves of the non-performing debt eating away at the financial system. Conservative estimates put bad loans at the nation's four biggest banks at 45 percent of total loans.

As China's national economy slows, meanwhile, there's no guarantee that the trend will by itself decrease inflation pressures.

As China's economy evolved, it took on an unwieldy dual structure. One is the top-down economy controlled in Beijing; provinces and cities run the other. Lending curbs to prevent excessive expansion by state-owned companies are cooling the top-down economy, but regional ones are proving difficult to control.

High growth rates have long been the best way for regional leaders to curry favour with China's central government, but that's limiting China's ability to curtail national growth.

Cities and provinces want to become world class with skyscrapers, international airports, fancy art museums and sprawling universities. They often ignore requests for slower growth.

Managing all this is easier said than done. The point is less about criticising China's efforts to walk this tightrope than warning investors things won't necessarily go smoothly.

It's telling, for example, that investors are all excited that China's imports increased last month at their slowest pace in more than two years. Yet imports still rose an eye-popping 22 percent from a year ago.

"If price stability is achieved, we will back down from our concerns that the economy is headed for a hard landing," Weinberg says. For now, "rising inflation leaves the door open for the worst to occur over the next year, at any published rate of GDP growth". - Bloomberg

Published on the web by Business Report on October 24, 2004.