Must-know: China’s economy tanks but beats apocalyptic market expectations

Market Realist

China posted a Q2 GDP growth of 7.5%, yet the market rallied

Gross domestic product (GDP) is one of the main metrics of economic health. Along with inflation and unemployment, it belongs to the group of classic economic variables.

The problem with GDP, though, is that it takes a long time to measure, and generally, results come out after the market has priced in much of the expectations of the outcome based on proxy variables. So GDP is more of a lagging indicator that serves mainly to confirm forecasts.

The 7.5% growth posted by China (FXI) was above expectations, since most analysts were gauging a number between 7.0% and 7.5%, in line with the expectation of an end-of-year number below the government-stated target of 7.5%.

Shady target

The target was very believable to start with—especially after last week, when Finance Minister Lou Jiwei told press members in the District of Columbia that growth was expected at 7%. State-run media quickly restated the answer and updated news runs to show 7.5% instead of the 7.0% first mentioned.

To make matters murkier, last week, the Chinese government suspended publishing several sub-indices, including exports, imports, and inventory data. It gave no explanation for the move.

If the number is irrelevant, what is relevant?

Given the likelihood that the 7.5% growth number is inaccurate or just straight-up manipulated, investors can instead focus on more relevant proxy data that may reveal trends faster.

Industrial production slowed to 8.9% in June from 9.2% in May. Given that almost half of China’s GDP is the manufacturing sector, this is a sign of slowdown.

Additionally, lower industrial production is likely a result of lower exports. Indeed, exports declined 5% between May and June.

The counterpart to exports is imports. In a country that’s growing significantly, imports should remain stable or grow—especially oil-related imports. China’s oil imports declined in the first half of 2013.

While the overall GDP headline is important, you can’t take it at face value. Even if China had posted a 5% or 10% GDP growth, the market should have realized that the figure was meaningless—just as it is right now.

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