18 April 2015

Why China's Numbers Are Worse Than They Seem

APR 15, 2015

If ever China needed to serve up a decent GDP report, it was today. With stocks booming, global growth uncertain, India catching up and Beijing's Asian Infrastructure Investment Bank coming online, now isn't the time to betray weakness. So, like any good command government, China reported gross domestic product grew 7 percent in the first quarter, exactly as expected.

The number is a mirage. Other data show China limped out of the first quarter: Industrial output slumped to 5.6 percent and retail sales climbed just 10.2 percent in March. Fixed investment growth slowed to 13.5 percent in the first quarter, while property sales fell 9.3 percent between January and March. Meanwhile, money supply is contracting. There's no doubt the People's Bank of China must act assertively to avoid a much-feared hard landing. The real question is whether even additional stimulus will work this time.

Much of the exuberance pushing mainland and Hong Kong stocks into the stratosphere recently has been based on faith that PBOC governor Zhou Xiaochuan is about to loosen monetary conditions on the mainland. If Zhou doesn't slash his 5.35 percent lending rate soon, China could see equities collapse along with property. But there are at least three reasons to wonder how much impact additional rate cuts are likely to have.

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