China’s economic numbers simply fail to add up

There are broader issues at play as Beijing revamps policy amid seismic regulatory changes and domestic upheaval

Burrow through China’s economic data and the numbers simply do not add up. Even when you strip away the property sector crisis triggered by Evergrande and the energy squeeze, the figures fail to reveal the true picture.

Nation-wide unemployment and underemployment are simply brushed under the carpet. Nearly 280 million migrant workers are not even included in the official jobless data. They make up close to 35% of the country’s workforce. 

On top of that, consumers are reining in spending, which is bad news for President Xi Jinping’s “dual circulation” economic model.

Still in the embryo stage, the policy involves boosting high-quality growth through expanding domestic demand and turbo-charging exports. But there is a snag. Increasing “consumption” means increasing household income.

“China’s low domestic consumption rates – among the lowest in history – are mainly the consequence of Chinese households retaining one of the lowest shares of GDP on record,” Michael Pettis, of Peking University’s Guanghua School of Management, said.

‘Social credits’

“This means that conditions that strengthen consumption result in less competitive exports, and vice versa,” he wrote in a commentary, entitled Will China’s Common Prosperity Upgrade Dual Circulation?, for the Carnegie Endowment for International Peace.

To square the circle will mean rebalancing income levels without threatening “China’s export competitiveness.” A possible solution is “social credits” for low- and even middle-income families, paid for by increased taxation on business profits and the wealthy.

As Beijing’s brains trust grapples with the conundrum before next month’s highly-anticipated sixth plenary session of the Communist Party of China’s Central Committee, the economic outlook appears challenging. A view that will be analyzed by Xi’s inner circle after this week’s data dump.

  • The National Bureau of Statistics reported third-quarter GDP data and monthly figures on October 18.
  • The economy expanded 4.9% in the past three months compared to 7.9% annual growth in the second quarter.
  • Power cuts hit industrial activity as did a slump in the real estate sector.
  • Property floor space under construction fell 19% in the third quarter compared to the same period last year.
  • Funding for property developers dropped 11.3% year-on-year in September.
  • That resulted in a 3.5% year-on-year fall in real estate investment in the month.
  • Infrastructure fixed-asset investment also fell 4.5% in September compared to the same period in 2020.
  • It was the fifth consecutive month of negative growth.

There were also concerns about China’s unemployment data. Officially, the urban jobless rate fell to 4.9% in September, the lowest since 2018. 

But delve deeper and the figure for those aged between 16 and 24 was 14.6%. At the same time, rural unemployment could run into tens of millions.

“We must continue to put employment high on the agenda and see that assistance and support policies are fully delivered,” Premier Li Keqiang warned.

Another crucial area where the signals appeared mixed revolved around retail spending.

The official data from the National Bureau of Statistics showed growth of 4.4% in September compared to 2.5% in the previous month. But massive floods, the start of power shortages and seismic regulatory changes pummelled consumer sentiment in August.

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“China’s real retail sales this year are by far the weakest relative to many pre-covid years. It’s something that pre-dates the real estate shock,” Sergi Lanau, the deputy chief economist at the Institute of International Finance, tweeted on October 18.

Looking ahead, the world’s second-largest economy faces significant headwinds. The International Monetary Fund highlighted the risks in its Global Financial Stability Report, which was released this week.

“Financial vulnerabilities have risen further in China during the [Covid-19] pandemic. They remain elevated across various sectors, including non-financial firms, households, banks, and asset managers,” the IMF stated.

“Total social financing, excluding government bonds, had increased to about 230% of GDP as of June 2021, up 15 percentage points from the end of 2019,” it said.

When it comes to China, going beyond the statistics is crucial. After all, transparency is not the ruling Communist Party’s strongest suit when playing the numbers game.

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