China Economic Outlook 2015: Why the Numbers Don’t Make Sense

Chinese Economic OutlookWhile a stock market bubble is continuing to brew in China, you really have to shake your head after Beijing said its second-quarter gross domestic product (GDP) expanded at seven percent. And this is at a time when the country’s economic outlook for 2015 shouldn’t look that strong.

It’s true the country is not growing the way it used to. Its heyday of double-digit economic growth helped to catapult China to the second-largest economy in the world. But at the same time, you need to wonder hard about the validity of the reported metrics.

Seven Percent GDP Growth Reasonable?

Many of you know that while I have long liked China as a long-term growth play, I have also been regularly wary of the somewhat contrived economic numbers emerging from Beijing.

We have been witnessing the slowing in China as evidenced by numerous economic metrics. Demand for Chinese-made goods from the global economy has been soft since the Great Recession in 2008.

The government has shifted its focus to drive consumer spending-led GDP growth similar to what we see in the United States. Perhaps this is working. It would explain the GDP, but again you have to wonder what to believe out of the country.

Some pundits are saying the seven percent reading was reasonable, as the estimate was 6.8%.

My view is that the reading seems just too good to believe given the situation there. The reading for the second quarter matches the reading for the first quarter and Beijing said it’s on the path to meet its seven percent target for this year. Seems a bit contrived, to say the least. My economic outlook for China based on what I have been seeing over the past year is clearly not as positive.

China Economic Outlook 2015: Credibility Issue

The problem is that China doesn’t report GDP like the United States. There is not an advanced first and final reading; it’s simply one number reported by the millionaires and billionaires in the party. With a population of 1.3 billion people and the economic reporting likely inferior in China, the task of gathering the numbers for inclusion in the GDP is quite daunting. It’s hard to imagine how GDP could be reported with no adjustments thereafter. This leads to a credibility issue.

With the Shanghai Composite Index down about 30% from its unsustainable peak, we are seeing panic in China—especially among the smaller uninformed investors who view the stock market as an online Macau. The index had been up 140% in a year, so seeing the backlash is not a surprise. I expect stocks could correct down 50% despite the efforts of the Chinese government to prop up the stock market.

But what really concerns me is the impact of the lost wealth that I have heard runs in at around $3.0 trillion and counting. While tens of trillions have been made on stocks, much of the wealth accumulated by the neophyte investors coming late into the game is evaporating with the decline. This will translate into less spending power and impact GDP in the upcoming quarters. The question is; will this be reflected in the reported numbers?

For the time being, I would be cautious towards Chinese stocks and not buy on the dips as the trough could be much lower.