"Kee" Points with Jim Kee, Ph.D.


  • Chinese Data
  • Chinese Markets

Chinese Data

China’s 3rd quarter GDP growth rate slowed to 6.4% according to official statistics released on Friday. The Wall Street Journal headline read, “China Posts Weakest Growth in Nearly a Decade.” On a different page and in the same Wall Street Journal was a take on the Chinese infra-structure spending glut that has resulted in many empty high-rises, roads, museums, etc. ("China Finds Big-Ticket Spending is a Road to Nowhere”). Finally, mention was made of the fact that the Chinese stock market is down -25% year-to-date. These are all somewhat related. China’s growth rate has been slowing for almost a decade, partly by design as the Chinese government transitions to a more consumer-oriented economy and partly because growth rates are hard to maintain as an economy gets larger. At $13 trillion, China’s economy with a 6.5% growth rate adds the equivalent of another Netherlands to the global economy every year. Recall that Gross Domestic Product (GDP) is an attempt to measure “market-valued” output of goods and services produced by an economy. Its effectiveness as a measure of economic size between countries is impaired when a lot of a country’s output is not produced and sold by commercial enterprises (i.e. “market valued”) but rather by government spending projects, as is the case with much of China’s economy. For example, do empty, recently built commercial buildings that might have to be torn down or sit empty for decades constitute economic output? That’s an old conundrum when trying to compare GDP’s of market economies and communist economies. So China’s GDP is probably overstated somewhat. Five years ago in one of our market updates, I used the following quote from the consulting firm McKinsey and Company, and I still think it is the best perspective to keep in mind when thinking about China:

 

“While many economists now project that China’s average annual economic growth will fall to between 5 and 7 percent a year during the next decade, I expect it to slow even more, perhaps to 3 to 4 percent a year. In modern history, no country that has experienced an investment-driven growth “miracle” has avoided a slowdown (such as Japan’s after 1990) that surprised even the pessimists, and it is hard to find good reasons to think China will be an exception.”


Chinese Markets

Is that what the stock market is telling us this year? Probably not, or at least not entirely. Chinese officials rushed out to reassure Chinese (and global) stock market participants that the Chinese economy remains stable. Officials attempted to downplay the impact or concern over trade conflicts with the U.S. Vice Premier Liu, China President Xi Jinping’s lead economist (Wall Street Journal), asserted that “the psychological impact is bigger than the actual impact” regarding trade disputes, and he asserted that the U.S. and China are in contact. In truth, the Chinese stock market has not correlated well with the Chinese economy, a function of its primitive (by modern economy standards) or early stage of development. That has changed somewhat in the past few years, but I wouldn’t attribute the -25% decline in Chinese stocks this year solely to the decline in GDP growth from 6.8% in the first half to 6.5% in the third quarter. I think the imposition of U.S. tariffs on some $250 billion of Chinese goods and $110 billion of Chinese tariffs on U.S. goods, with threats by President Trump of more in January (raising the current 10% tariffs to 25%), explains a good deal of the angst in the Chinese stock market. To be honest I think the recent chip scandal, in which Chinese “spy” computer chips were discovered in motherboards produced by Super Micro Computer for computer server maker Elemental, could push China to be more cooperative. Amazon discovered the secret chips in the course of its due diligence in evaluating a potential acquisition of Elemental, and Apple apparently discovered the same thing. All of this makes for fascinating reading in the original article by Bloomberg, and I highly recommend it. It is titled, “The Big Hack: How China Used a Tiny Chip to Infiltrate U.S. Companies.”