Liu Shijin, former Deputy Director of the Development Research Center of the State Council, argues in a recent People’s Daily op-ed that China will become a “high income economy” within the next eight years.

Liu says China is currently a “middle income economy”, the third of four income stages as defined by the World Bank. Liu claims that China’s road to the forth income stage is “inevitable”.

China rose from a low income economy to a lower-middle economy in 1999 largely due to significant growth in foreign trade. The current upper-middle economy began in 2010, and is predicted to last until 2023 at which point China’s economy is expected to transition again.

However, before China can become a high income economy, it must first bypass the “middle income trap”. This occurs when an up-and-coming market becomes stagnant, losing its forward momentum. According to Liu, while China is at risk of stalling due to a lack of innovation and cheap labor, reforms made by the Central Committee of the Communist Party of China will overcome the middle income trap. These structural reforms will get rid of stock reserves, raise the quality and efficiency of production supply, lower costs, and increase productivity and competitiveness.

However, Liu cautioned that China still lags behind other developed countries. Liu noted that China’s current gross domestic product per capita (at purchasing power parity), one of the indicators of a country’s standard of living, is only $12,600 compared to $55,000 in the USA and $110,000 in Luxembourg.

Zhuang Juzhong, co-author of a 2012 report commissioned by the Asian Development Bank and Peking University, argued that China’s continued growth is largely dependent upon adopting an economic strategy that fosters innovation, inclusiveness and green technology. “Under such a scenario, the economy could grow 8 percent annually from 2010 to 2020, and 6 percent annually from 2020 to 2030,” said Zhuang.

The post Economist Predicts Significant Economic Growth For China By 2024 appeared first on The Nanfang.

According to the video, titled The Kung Fu of the Chinese Economy, there is an explanation rooted in Kung Fu for each and every recent economic policy introduced in China.

First, here’s the video The Kung Fu of the Chinese Economy:

Now, let’s take a look at the video’s four lessons:

Retreat to Move Forward 退为进 静制动

Borrowing from the final chapter of Sun Tzu’s The 36 Strategems (usually seen as 走为上), “retreat to move forward” describes the current sluggish state of the Chinese economy. As the video states, “Slower growth is needed to allow time for restructuring before pushing to the next level.”

“Retreat to move forward” also involves a “reactive” element adopting a “wait and see” posture, an element integral to certain martial arts like tai chi or wing chun emphasizing slower movements to “harness the power of your surroundings”.

Perseverance Ensures Success 徐疾有序 久久为功

“Don’t give up and you will eventually succeed” emphasizes the second principle. The second part of the principle speaks to the importance of “enduring small setbacks”. In kung fu it is important to train and learn to endure both the hottest and coldest days of the year to reach your full potential. According to the video, in economic terms, it is important to persevere and ride the hot highs as well as the cold lows.

Do as Nature Does! Learn from Nature! 天人合一 道法自然

According to the video, China’s massive economic growth must finally be reined in because “The Chinese economy can no longer afford to ignore the role of nature and the environment.” As the text above tells us, there must be “harmony between humans and nature; the Way of the Tao is to obey nature.”

Share Widely for Mutual Benefit 惠己达人 精进共享

In the video, the Chinese martial monk is seen giving a hand to different martial artists from different countries. We’re told that “Above all, Kung Fu strives to cultivate the mind by encouraging different styles and promoting integration and sharing,” and that “Sharing is also essential to the future of the Chinese economy.”

As nice as that sentiment is, sharing has never been an integral part of Kung Fu’s heritage in China, where competing sects and disciplines have historically battled one another for supremacy and secrecy, particularly in its cinematic depiction referred to in the video. To provide one recent example, this spring’s latest Ip Man sequel features a plot based upon one kung fu master trying to win martial dominance in a city through a hostile and brutal takeover where sharing is not allowed.

Kung fu is a culture that can provide enormous benefits to its practitioners. Likewise, the Chinese economy has made tremendous strides over the past decades. And yet, despite Westerners looking for answers, comparing martial arts to the slowing state of the Chinese economy seems a bit of a stretch.

The post Watch: China’s Economy Explained Through Kung Fu appeared first on The Nanfang.

Titled “Statistics show economy still flourishing despite West’s naysayers“, the op-ed argues that, although “Western observers” are contradictory in their views toward China, they remain uniform in their disapproval:

When China’s booming economy grew at an annual rate of more than 10 percent, they considered such a situation was both perplexing and worrying, and concluded a view known as the “Chinese Economic Threat.” In contrast, when the growth rate slows down to 6.9 percent, they hold their bearish position and predict an economic crisis.

According to writers Chen Fei, Vice Dean of Political Science at the Zhongnan University of Economics and Law, and Yuan Yuan, one of the University’s students, history is on the side of China:

Throughout the past 30 years, Western observers who were pessimistic about China’s development have proved wrong, and soon the voices of betting against China will peter out into a historical footnote… In 2011, US economist Nouriel Roubini came up with a devastating prognosis on China’s economy and its economic growth pattern. He believed that China would probably have a hard landing in 2013. But in fact, China’s economy has not suffered the crisis as he predicted.

After asserting that “Naysayers only focus on the challenges of China’s economy instead of its achievements,” the op-ed offers some statistical evidence to argue that everything is just fine:

Our industrial structure is being further optimized. As data shows, in 2015, the tertiary industry’s growth value accounted for 50.5 percent of GDP, which surpasses the objectives of the 12th Five-Year Plan.

Beyond that, mainland investors realize an accumulative total investment of 735.08 billion yuan ($112.9 billion) in 2015, with year-on-year growth of more than 14.7 percent.

In short, one aspect of the Chinese economy performed better than plans made in 2011, and there are more Chinese investors than before. However, this is the extent of the statistical analysis, save perhaps the line: “In terms of commodities, China’s import of soybeans increased by more than 44 percent in 2015.”

Instead, what we get are further arguments that there’s nothing but clear sailing for the Chinese economy:

As a matter of fact, the continuous improvement of systems and policies indicates the tenacity of China’s economy. At the same time, the transformation of the economic structure is being propelled steadily and will lay a solid foundation for the steady growth of the global economy. In addition, the gradual enhancement of international production capacity cooperation offers a huge investment opportunity for countries all over the world.

After noting that the economic rise of China is “a direct and significant influence on Westerners’ vital interests”, the Global Times concludes that it’s their duty and responsibility to inform “Western observers” of the truth:

We need to strengthen communication with them and clarify confusion.

The post Global Times: The West is Wrong in Doubting Chinese Economic Growth appeared first on The Nanfang.

The Washington Post reported the open letter was published early March 4 on a website called Wujie News (watching.cn), a media platform partially backed by government ties. After attracting online attention, the entire website was shut down. Upon resuming service, the offending article had disappeared from the website servers.

The scathing letter is an indictment of Xi Jinping’s failure to properly serve as China’s president. Written by “loyal Communist Party members”, the letter condemns Xi for “abandoning the principle of collective leadership” by having “consolidated all authority”.

The letter argues that Xi is to blame for a number of things that have brought “an unprecedented crisis” to China: layoffs due to overproduction, an escalation of conflict in the North Korea issue, the stock market crash, and real estate market turmoil, and more. The letter also criticizes Xi for creating a cult of personality by commissioning artists to write flattering songs praising him.

The letter also asks Xi to resign out of “safety for you and your family”, referring to a inner power struggle that threatens to spiral out of control.

Most ominously of all, the letter warns that another Cultural Revolution is imminent under Xi’s control, saying the people won’t be able “to endure another ten years of calamity!”

One person is suspected to have disappeared in connection with the letter. On March 15, columnist Jia Jia disappeared after boarding a flight from Beijing to Hong Kong, and has not been heard from since.

The letter first appeared on overseas website Mingjing, and not in mainland China. According to the Apple Daily, computer hackers are responsible for its appearance on watching.cn. Citing sources close to the incident, the hacking “had been planned in advance” since it took place at the exact same time that overseas websites published the letter.

Here’s the entire letter as originally seen on the Watcher:

Open Letter Requesting Xi Jinping to Resign from the Party and from His Position as Leader of the Country

Greetings, comrade Xi Jinping.

We are loyal members of the Communist Party. At the time the national “two sessions” convened, we have written this letter to you, asking for your resignation from the Party and from all posts held as leader of the country. These requests come out of consideration for the Party, the future of the country and its people, and, as well as for the safety for yourself and your family.

Comrade Xi Jinping, ever since you were selected to be the new secretary-general by the Central Committee at the eighteenth national general congress in 2012, you were resolved to improve a growing malaise by fighting against the tigers of corruption, as well as corruption within the Party. You have designated yourself as leader of the group for deepening comprehensive reforms for the Central government, as well as a number of other groups. You have perform a number of acts to develop the economy. You have the popular support of a portion of the people. These are all things that are apparent to us.

However, comrade Xi Jinping, there is something we can’t ignore. Due to your methods by which you have consolidated all authority into your hands, directly deciding things in all domains by yourself that include government, economy, and culture, you have created an unprecedented problem and crisis.

In terms of politics, you have abandoned the most upstanding traditions of the Party, of which the most egregious being that the expressed support of leaders at all levels of government are required (for your position). You have abandoned the principle of collective leaders of the Standing Committee, a core of the democratic collective system, and instead have excessively centralized authority. By consolidating the National People’s Congress, the Chinese People’s Political Consultative Conference, the State Council and the Party all together, you have weakened their independence from one another. This compromises the authority of other comrades that includes State Council Premier Li Keqiang. Simultaneously, patrols dispatched by the Central Commission for Discipline Inspection to institutions and state enterprises have been a new bastion of authority, thereby obfuscating the jurisdiction of authority currently held at all levels of Party committees and government. Such a policy has sown disorder.

In terms of foreign affairs, you have abandoned comrade Deng Xiaoping’s consistent policy of maintaining a “low profile” for the country and instead blindly acted. Not only have you failed to foster a good environment for international relationship around the periphery (around China), but also have allowed North Korea to successfully carry out experiments on atomic bombs and guided missiles, thereby creating a huge threat to the safety of China. Additionally, you have allowed the USA to return to Asia and created a united front with South Korea, Japan, the Philippines, and other South Asian countries in order to unite and constrain China. In regards to issues with Hong Kong, Macau, and Taiwan, (you) have not complied with comrade Deng Xiaoping’s “one country, two systems” concept. In this hopeless situation (you have created), the Democratic Progressive Party has come to power in Taiwan, and the independence movement continues to rise in Hong Kong. In particular, the return of a Hong Kong bookseller is an abnormal practice that has directly harmed the “one country, two systems” concept.

In terms of economics, you have directly been involved in the creation of macro and micro-economic policies by way of the committee for Central finance and economy. This has led to the vast turmoil of China’s stock market and real estate market where the masses have lost hundreds of thousands of yuan in personal savings, filling the land with victims with no where to turn. Your policies on production capacity has led to massive layoffs of workers for state-run companies, while a growing trend has become for private companies to go bankrupt, sending swarms of workers into unemployment. The “one belt, one road” strategy has sent huge amounts of foreign-exchange reserves into disarray throughout the country and its regions, never to see any returns. As the foreign-exchange reserve has been excessively consumed, the Renminbi has entered a period of devaluation. This has caused a decline in confidence from everyone. The national economy is on the verge of a collapse, and the will of the people is changing.

In terms of ideology and culture, you have emphasized that “the media should take after the same name as the Party” (adopt the same principles), thereby ignoring the humanity of of the press, shocking the entire nation. You support untalented people like Zhou Xiaoping and Hua Qianfang become the preeminent representatives of Chinese art and literature, thereby bitterly disappointing scores of artists and writers around the country. You have cultural work units flatter you with songs that praise you. The sister of your wife Peng Liyuan was featured on the Spring Festival Gala as a producer, turning what was originally a warm spectacle of the Gala for families to watch into a tool for propagating your personal interests. By indulging in personal worship, not permitting discussion in the Central (government), and only permitting expression that is synonymous with the Party, all these things can’t help but make the rest of us who have experienced the Cultural Revolution very anxious — neither our Party, country, nor people can bear to endure another ten years of calamity!

Comrade Xi Jinping, you have carried out high-handed anti-corruption drives that have been effective in correcting the malaise of the Party. However, because no proper follow-up measures have been adopted that have objectively brought about a negligence throughout all levels of government at the present time. Along with officials afraid to do anything and open discontent from the masses, there has been an acute deterioration of the economy. It is also clear to us that the target of anti-corruption drives are the result of a inner power struggle. We are worried that this kind of intense inner Party power struggle may become a risk to the safety of you and your family.

Therefore, comrade Xi, we consider that you don’t have the ability to lead the Party and the country into the future, and are unfit to hold the position of general-secretary. For the prosperity of the Party, for the long-term peace and stability of the country, for the safety of yourself and your family, we request that you quit all positions in the Party and in the country. Allow the Party central committee and the people of the country to select a sage that will bring positive progression as we march into the future.

your sincere communist Party members,
March 2016

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On March 6, Lu had told the National Legislature that 80,000 Longmay workers had been paid all of their wages, and had never had a pay cut. In response, the workers staged demonstrations in the city of Shuangyashan before marching on the company’s local offices, claiming they hadn’t been paid for several months’ work.

“I made a mistake about the earlier claim because I received the wrong report,” Lu said. “No matter who made the mistake, wrong is wrong, we have to correct it,” he said.

A statement later released by the provincial government acknowledged that many of the employees were owed wages and benefits, but it failed to mention Lu’s previous comments asserting the workers had been paid. Notably, Caijing had reported that Longmay workers’ wages had been continually cut, and had not been paid for three or four months.

Longmay’s annual payroll had reached 10 billion yuan ($1.54 billion), or about a third of the provincial government’s fiscal budget.

The controversy appears at a time when the Chinese government has announced layoffs to the mining and steel sectors, citing overproduction and a sluggish economy. Originally set at 1.8 million jobs, later estimates have ballooned up to five or six million layoffs.

According to state media reports, Longmay had recently reduced its workforce by 22,500, despite already owing 800 million yuan in back pay for 2014.

The post Miners Protest in China to Claim Mining Company is Months Late on Wages appeared first on The Nanfang.

Stocks for the China Railway Construction Corp. rose by as much as 6 percent on the Hong Kong stock exchange on Monday, while the China Communications Construction Co. experienced a similar increase in its Hong Kong stocks which rose by as much as 5.5 percent.

During Saturday’s session of the National People’s Congress, Premier Li called for giving “top priority to development” while Minister of Transportation Yang Chuantang announced the construction of 50 new airports during the 13th Five-Year Plan, which will run from 2016 to 2020.

The airport constructions kicks off a three-year action plan to develop major transportation infrastructure in China. The National Reform and Development Commission has said more than 300 projects will be launched between 2016 and 2018.

The new airport construction will focus upon China north and west where much of the country’s underdeveloped regions are located. Fourteen conjoining poverty-stricken areas and 477 key counties have already been targeted for development by the ministry.

Additionally, the plan calls for upgrading airports in Harbin, Shenzhen, Kunming, Chengdu, Chongqing, Xi’an and Urumqi in order to turn them into international hubs.

“Short-term growth”

According to Tom Orlik and Fielding Chen of Bloombery Intelligence, the familiar plan to invest in infrastructure as a way to support the economy is full of risks because “the focus is firmly on supporting short-term growth, with the deleveraging can kicked further down the road.” They write:

“The risk is that if stimulus is accelerated but reform continues to lag, the government could end the year with growth on target but even bigger structural problems to deal with.”

This past January, Deputy Director of the Civil Aviation Administration of China (CAAC) Dong Zhiyi had said China plans to build 66 new airports over the next five years. Costing  77 billion yuan ($11.7 billion), the transportation infrastructure upgrade would pay for eleven key infrastructure projects and 52 upgrades on existing civil aviation facilities.

Citing a rise in air travel that saw Chinese take four billion domestic trips and over 100 million international trips last year, the CAAC plans to not only increase the number of airports but also the number of domestic and international routes.

Ghost airports

However, expanding China’s airports is a move that hasn’t always paid off.

Xu Hongjun, a professor at the Civil Aviation University of China, admits that the expansion of airports in China is not good for everyone. “A lot of small airports are not doing well. They need a lot of subsidies from the central government. They were too optimistic,” said Xu.

In worst case scenarios, new airports become neglected after construction because they have failed to attract passengers. 

Following the 2007 completion of the Libo Airport in Guizhou at a cost of $57 million, the airport made headlines after receiving only 151 passengers in all of 2009.

Compounding the issue of airport expansion is the fact that Chinese airlines have been rated as some of the worst in the world, and that Chinese passengers normally have to endure numerous flight delays when traveling in China. Domestically, Chinese airlines are also facing increased competition from the country’s high-speed rail network, which offers passengers a more affordable way to travel within China.

The post Transportation, Infrastructure Shares Surge After China Pledge to Invest in Airports appeared first on The Nanfang.

Having already broken records last March, property prices in Shenzhen have gone insane over the past 12 months, growing by an astonishing 52 percent, its fastest pace since 2011.

With an average price hovering around 60,000 to 100,000 yuan per square meter, new homes in Shenzhen cost much more than new flats in Hong Kong’s New Territories despite the medium income in Shenzhen (4,500 yuan per month) being only a third to that in Hong Kong.

To complicate things further, Shenzhen’s high property prices are complemented by a glut of new homes under construction, awaiting future buyers. 8.08 billion square meters of new homes are either under construction or currently available for sale, up 12 percent from 2014. At current rates of purchases, it would take 6.3 years to sell them all.

Meanwhile, other first-tier cities are experiencing massive property price hikes of their own. Shanghai has seen its property prices jump by 17 percent, while Beijing and Guangzhou have both seen increases of 10 percent.

Support for the economy vs bubble risk

What’s behind this phenomenal rise in property prices? The central government is supporting the economy through monetary stimulus and by rolling back property curbs, which it did in February. But this also risks further fueling the property bubble.

“Property prices continued to soar in cities like Shenzhen and Shanghai for the past month, driven by the sharp surge of credit expansion, which appears to be endorsed by the central bank and local governments as a way to reinvigorate sales and digest inventory in third- and fourth-tier cities,” wrote analysts in a report from HSBC Holdings, reported Bloomberg.

In more direct terms, UOB Kay Hian Ltd. analysts wrote in a March 2 note, “The bubble has been growing big.”

But even as markets in first-tier cities start to become overheated, smaller cities show that they are willing to manipulate conditions to heat up their own market. For example, Shenyang casually floated the idea of a zero down-payment mortgage policy to boost its new housing market that slipped 0.5 percent in January before meeting strong resistance from the People’s Daily.

Noting that Chinese authorities have done this before, Eric Lui of the Hong Kong Economic Journal noted the correlation between housing sector contributions and overall economic growth has weakened due to unreliable GDP estimates and a national restructuring of its main industries, like construction.

Lui warned:

The property market cycle in Hong Kong over the last 20 years shows that if home prices spike over 50 percent within 12 months, as we’ve seen in 1997, the stage is set for a bursting of the bubble.

This is something that Shenzhen property buyers should bear in mind.

Panic buying

And yet, despite warning signs pointing to disaster, Shenzhen buyers continue to buy despite prices that continue to grow with no signs of stopping. What makes someone act in this way?

According to David Scutt of the Business Insider, there’s an acronym for this: FOMO, or the Fear of Missing Out. Scutt writes that the same inspiration that led Chinese investors to bandwagon on the Chinese stock market before it crashed last summer looks to be the same thing driving new homeowners to buy new homes despite their exorbitant prices.

The same way Chinese investors saw stocks with ever-increasing prices as a “no-brainer”, now they view homes the safe way.

Bloomberg interviewed 35 year-old civil engineer Liu Yihui who said he decided to buy a new home since it is his best option for the time being.

“People are a bit crazy in this market, but what can you do?People are a bit crazy in this market, but what can you do?” said Liu. “Stock returns were terrible, so I made up my mind to put my money in real estate.”

FOMO is also what made 61 year-old retiree Yao Peirong buy a two-bedroom apartment on the outskirts of Shanghai for 6.6 million yuan on February 19, after first borrowing 300,000 yuan within an hour after his first viewing to secure the purchase.

“I couldn’t sleep,” Yao told Bloomberg. “Home prices in this neighborhood have jumped almost 11 percent since two weeks ago.”

And with all these warning signs that a housing market crash is imminent in China, it’s amazing what some people will do for a good night’s rest.

The post Bubble Trouble: Property Prices Surge Over 50% in Shenzhen appeared first on The Nanfang.

Just on the other side of Hong Kong’s northern border, and across a small river, lies Nanshan District. Fields and villages thirty years ago, the district has risen quickly, a model example of Deng Xiaoping’s vision of socialist capitalism.

According to the local governmemt website, in 2014 Nanshan’s GDP per capita rose to 308,000 yuan ($49,000), the highest for any district in China, overtaking Hong Kong, and catching up with Singapore. Total GDP rose 9.6 percent in 2014 to 352 billion yuan ($56bn), on par with Macao. Not bad for a land area of 185 square kilometers.

Powering Nanshan’s explosive growth are over 8,000 tech companies, including 109 which have already listed. The district is home to some of China’s leading tech companies, such as Tencent, designers of the popular Wechat app, whose features have since been copied by Facebook, and TCL, the third largest TV manufacturer in the world.

From Hong Kong’s perspective it would be tempting to dismiss this success as government directed — fake, even. After all, it was Hong Kong’s capital, talent and knowledge which helped build Shenzhen in the first place.

This viewpoint’s inherent weakness is that was then, around 1990, when Nanshan was officially granted district level status, and Hong Kong’s economy relied on trade, finance and real estate. Not much has changed in Hong Kong since then, resulting in fewer job choices for Hong Kong’s talented graduates and young job seekers.

Shenzhen on the other hand offers graduates an array of employment opportunities, across many industries, and the promise of growth. Shenzhen’s economic zone created the conditions for this, provided enterprises with land, subsidies, and relaxed business regulations.

In Nanshan, it’s the hi-tech companies and their employees who design the new apps, not government officials. In Nanshan in 2014, a total of 20 billion yuan ($3 billion) was invested in R&D, comprising 5.8 percent of GDP, three-quarters of which was from science and technology firms. That’s the same as levels in developed economies.

Yet regardless of how this innovation and growth was derived, the results are still real. A concentration of tech companies in one area produces agglomeration effects, which boosts productivity and workforce skill levels. The same workforce’s consumption then triggers other sectors in the local economy via the multiplier effect, or they branch off and setup new companies.

One example being Erick Kuo, who left Tencent in 2014 to setup MYOTee, a mobile phone app, in Nanshan’s Knowledge Park.

The approach of Nanshan to driving economic growth could be viewed as a blueprint for the Chinese government’s industry policy “Made in China 2025”, which aims to push China’s manufacturing up the production value chain, and maintain economic growth.

Despite gloomy headlines of China’s future economic outlook, the composition of Shenzhen’s economic growth is diverse, and supported by healthy demographics. Barring any change in government policy, unfortunately the same cannot be said of Hong Kong.
Translations on China’s economy can be found on the chiecon website.

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Prof. Huang uses two simple examples from his book to illustrate his point.  First, though economists with Chinese encouragement classify private companies based upon their legal classification, this overlooks the importance of government shareholdings.  As Chinese banks can attest to today, just being a listed company does not make you a private enterprise.  According to his calculations, if we account for these types of distinctions, as much as 80 percent of the Chinese economy is still managed by the state.  Second, many “Chinese” companies that most people have heard of such as Lenovo and Alibaba are not actually Chinese companies.  They are registered elsewhere for good reason.

There are many other examples in the book and many others I could provide about the importance of paying attention to the details of the Chinese economy.  I by no means claim to have mastered this art but I am continually asking how can we dig beneath the surface of a flashy number or statistic to make sure I am understanding and taking prudent precaution to verify a specific issue.  The problem is so frequently, when you dig beneath the surface of Chinese data, you uncover a bunch of dead bodies.

Yesterday, the National Bureau of Statistics China announced that retail sales China clocked in at a solid 10.8 percent growth.  There are however significant reasons to doubt this number.  As I have already written elsewhere, output of consumer products in China is flat or falling.  However, just because China isn’t producing consumer products doesn’t rule out the possibility that retail sales are going up.

To examine this closer, I downloaded data from the report covering the 50 and 100 largest retail enterprises in China with sales broken out by category.  Looking at the 50 largest retail enterprises in a year over year basis, except for jewelry, all other categories are negative. Looking at the 100 largest, jewelry is still the largest gainer at 8.7 percent with food registering a 4.9 percent gain.  Total retail sales among the largest 100 registered a total gain of 1.5 percent year-over-year. Most interestingly about the top 100 year over year retail sales, there is not one category that reaches the 10.8 percent claimed by the NBSC.

If we look at the year to date YOY sales of the top 50 retail enterprises, total retail sales grows by 0.9 percent.  In fact, only one category grows by more than 3 percent, jewellery which grew at only 4.2 percent.  The short version is that looking at the major retailers of China, there is no evidence to support the official statistics that consumer retail spending is a robust 10.8 percent.  While it is possible that major retailers are registering flat and declining numbers depending on specific category, while China nationally sees such robust growth of 11 percent is highly unlikely.  Furthermore, the retail sales of major retailers matches closely what we know about the flat output of consumer products in China.  It is very difficult to reconcile falling consumer output and flat major retailer sales with the official story of 11 percent growth.

There is however an even more important point that needs to be made.  Headline official data of 7 percent GDP growth and 11 percent retail sales growth are in most ways irrelevant to a firm.  Businesses rely on cash flow to pay for workers, machines, and space.  If we look at retail related cash flow for 2014, as it is not yet available for 2015, there is an enormous discrepancy between the official data of 12 percent retail sales growth and the cash flow associated with retail businesses.

Looking at the “Comprehensive Retail” financials, sales growth for 2014 was only 3.8 percent with profit growth of 4.4 percent. Food saw the largest sales growth at 5.7 percent in a year when China was touting national retail sales growth of 12 percent.  Even if we assume that GDP growth is actually 7 percent and that retail sales are proving robust at 11-12 percent, firms are not enjoying the cash flow benefits.  A high point of sectoral cash flow of 5.7 percent is not indicative of firms enjoying robust growth.  The slow cash flow growth would indicate that the retail slowdown has been going on much longer than initially believed.

There are a few points of economic analysis worth mentioning.  First, we pay close attention to GDP and retail sales because we expect them to be good proxies of economic health and activity.  However, firms pay with money not official GDP figures.  Consequently, even if we stretch credibility and accept official GDP and retail sales numbers as perfectly accurate, firms are not seeing the related cash flow. Second, it appears that the retail slowdown has been much more prolonged than people realize.  I present data here that covers revenue growth for the retail industry for all of 2014 showing sales growth of 3.8 percent.  Again, if we believe the official retail sales growth number of 12 percent, firms live on cash flows and the slow down appears to have begun no later than 2014.  Third, this data directly contradicts the entire economic rebalancing story in China.  According to the data consumption is simply not outpacing growth in the traditional drivers of Chinese growth such as fixed asset investment.  Fourth, this data comes much closer to matching most other data points we have such as consumer output, electricity, freight, and related data.  If we ignore the topline official data, none of the underlying and independent data supports a 7 percent growth story.

Despite what people may choose to believe or disregard, it is incredibly difficult to reconcile official national statistics with more granular industry data on retail sales.  Furthermore, when we also consider the consumer product output data coupled with large retailer sales data, it is difficult to accept official data.  The most worrying part is that even if official GDP and retail sales data is accurate, the cash flow required to support the debt and return numbers indicate significant stress at the firm level.

The more we pay attention to the details of the Chinese economy, the more difficult it becomes to reconcile with official data and the more worrying the picture becomes.

The post Digging Beneath the Surface of China’s Data: Retail Sales Edition appeared first on The Nanfang.

There are a couple of points that need to be emphasized.  First, $94 billion is definitely a little better than expected, but at the same time nothing to rejoice about.  It is still $94 billion, which even by Chinese standards and relative reserve standards, is big money.

Second, declaring a $94 billion drop in FX reserves a good month is like saying “it’s merely a flesh wound.”  Enough of those flesh wounds can be mortal.  $94 billion is still an enormous amount of defense by the PBOC.

Third, the evidence indicates not that the market is settling back down but rather that the market is betting more and more against the RMB stabilizing.  Capital appears to be flowing out at a faster rate with Capital Economics estimating August outflows at $130 billion up from $75 billion in July.  As I have noted, this number has been regularly increasing for a while now and shows no signs of slowing down.  This is placing downward pressure on the RMB so much that China is tightening capital controls.  What is amazing is that some people cite the possibility of Beijing implementing further capital controls as evidence of their control of the situation.  Beijing implementing stronger capital controls will demonstrate nothing more than a complete loss of control of the financial situation and investor confidence. Furthermore, the offshore rate is widening its divergence with the onshore rate to about 1.5 percent.  This is not indicative of a currency that is stabilizing or a central bank that is gaining investor confidence.

Fourth, China doesn’t have years of FX reserves.  Even at the rate of $100 billion a month, using the IMF baseline, it would have nine months of FX reserve depletion.  Assuming it went further, it would have 18-24 months.  China does not have the cushion many people assume.

Fifth, due to the tightening from RMB purchases, Beijing has been recycling this liquidity into the domestic system via reverse repos and related methods to the tune of approximately $180 billion.  Do the math: let’s say $100-120 billion was taken out via FX sales but $180 billion injected.  That means Beijing is providing $60 billion net liquidity to domestic financial institutions.  Banks are much tighter on liquidity than understood.

Sixth, pretty sure I was referred to as a “doom monger” today.  I’ve always wanted a cool nickname.

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