Looking Past Gigantic Base Effects To China’s (Really) Struggling Economy

In retail sales, the NBS provides relatively continuous nominal spending estimates. According to these, China’s consumers had disbursed rmb 6.97 trillion on goods in the first two months of this year. That was up from the low shutdown level of rmb 5.25 trillion last year, but only marginally better than the rmb 6.61 trillion outlaid during January-February 2019.

Thus, while retail sales were up a tremendous-sounding 33.8% from last year, total nominal spending only gained 5.5% over those two years. This works out to just 2.8% (compounded annual), indicating that, like last year’s figures, Chinese consumers remain significantly depressed (the official unemployment rate was thought to have increased to 5.5% by February from 5.2% in December), not having come back much at all from last year’s huge trough.

Prior to 2020, retail sales growth rates below 8% had been largely unheard of – to the point of eight being thought of as a floor. Now, not only did retail sales suffer huge declines in 2020, there hasn’t been any material advance out of that huge economic hole for China’s vast retail sector.

These numbers for early 2021 show that, so far as internal consumption is concerned, the recovery continues to be stalled far short of recovery for now lasting an entire year. The pre-2020 eight percent “floor” was already insufficient to achieve a “rebalancing” of primary economic factors. Though China’s 14th five-year plan relies heavily on “dual circulation”, with internal consumption still figured to be the greater part of it, more evidence of serious internal impairment raises even more doubts.

The secret to China’s massive previous growth had always been its supply-side heavy investment (FAI). Most of the world’s attention came to be focused on a misunderstanding of purported ghost cities, much of what urbanized and transformed the Chinese economy and society, what ultimately contributed to sustained growth (derived from eurodollar sources), was sustained robust investments in infrastructure and heavy industry rather than real estate speculation in condos.

More than anything, the post-Euro$ #3 (2014) drop-off in FAI demonstrated the precarious shape of economic (and political) risks; no wonder authorities came to emphasize consumption over investment, the latter simply fell off a cliff (dollar shortages will do that) leaving them no other options.

Here again, the NBS only provides a marginally helpful alternative data series to the unadjusted FAI estimates that rely on unreliable survey panels. As you can see below, authorities reclassify firms that has, over the past few years, made them ineligible (based on purported size limits) to be continuously included in the data; the reported numbers are lower one year to the next, but the NBS says apples to apples FAI has been up by small amounts.

Just how small, that’s again the question for investment beginning 2021.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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