Markets are up today, possibly on optimism over China’s fourth quarter GDP growth rate of 8.9%.
It has been long noted that Chinese economic data is not as reliable as that of the developed western economies, and many commentators who had been expecting weaker growthhave questioned the current data.
A number of concerns have been raised about the domestic residential property market which has seen significant price falls and declining sales of both land and completed units. Other areas that are worthy of note include the significant decline in the growth rate of auto production which has declined significantly in 2011, overall weakness in manufacturingand what would appear to be subdued growth in service sector output.
Of significance is the very large component of GDP growth accounted for by gross fixed capital investment. Based on recent Chinese datafixed capital investment was some 64% of GDP in 2011.
It is probable that the impact of the sharp recent decline in property market fundamentals may not have fully fed through to the overall economy and weaknesses in fixed capital investment dynamics going forward may take time to show through in GDP data. Growth will therefore depend on the ability to fund projects and the ability to find projects with positive growth rates.
The high fixed capital investment component (and the ability of the central government to support such) has supported growth but is just as likely to become a curse. Indeed, the ability to fund, influence and drive fixed capital investmenthas rendered much of your typical GDP analysis meaningless, but it is central to China’s ability to grow going forward. Return on capital is of course another thing completely and current growth in base GDP may not necessarily translate into high returns on capital.
In other words Chinese growth, given the weakness in global GDP dynamics, is more than ever dependent on gross fixed capital formation and the level of debt (and the sophistication of its mechanics) within its financial system and this is the rub: Chinese debt dynamics are very opaque. It could be that the ability to drive gross fixed capital formation forward is now dependent on a recovery in the key US and European markets. If this is the case, Chinese imports of western commodities and capital goods could also be at risk. If only knowledge of what was happening in China was more transparent and less dependent on the many worrying anecdotes we are seeing.
There is a lot riding on Chinese fixed capital investment.