“It blows my mind,” was the verdict of one Canadian ‘old China hand’ that WiC approached last week with the news that the growth in Chinese GDP in 2017 was the equivalent of adding ‘another Canada’ to the global economy.
The comparison was cited in the Financial Times which noted that China’s economy grew 6.9% last year, “which in purchasing power parity terms” meant “growth in 2017 equalled the size of Canada’s entire economy”. The Canadian that we emailed with this revelation ruefully observed: “When I moved to China in 1985 its economy was the same size as Spain’s.”
The London-based newspaper didn’t end its comparisons there, mind you. “Three decades ago China’s gross domestic product was about $250 billion, roughly the equivalent of Finland or Chile’s current economic heft. Today just the economy of Shenzhen – the mainland city north of Hong Kong – is a third bigger at current prices. The country’s overall GDP has grown to nearly $12 trillion.”
The occasion for the article was China’s 2017 economic growth blowing through all the estimates – accelerating to its fastest pace in two years. It was higher than 2016’s growth figure of 6.7% and far exceeded a government target of 6.5%.
Amid all this positive news, the Washington Post pointed to another bit of landmark data to emerge from China when it noted: “Retail sales in China are expected to equal or surpass sales in the United States this year for the first time, another definitive marker in China’s rise to economic superpower status.”
Last year US retail sales were $5.1 trillion and those in China came in at around $5 trillion. However, thanks to the latter’s consumer spending growing at a higher, double digit pace, the Washington Post reports that analysts estimates that Chinese retail sales may have already equalled or surpassed those in the US and will finish 2018 in the top spot at $5.8 trillion.
However, while this makes for good headlines, when you look a bit more carefully this particular milestone may – like many China stats – have to be treated with a bit more caution.
The problem: what China’s National Bureau of Statistics and its American equivalent ‘call’ retail sales are rather different things. The Chinese numbers include catering (the US numbers do not) as well as an unknown but significant share of the purchases of wholesale enterprises (such as large state-owned firms). The US data, on the contrary, counts only sales to ordinary consumers. So the two sets of ‘retail’ data are counting different things.
Instead there are better ways to compare China’s consumer sector with that of the US – and these tend to support the view that the American consumer remains king.
Chart 1 shows levels for total household consumption. The US figure here is $12.8 trillion versus $4.4 trillion for China. The big discrepancy this time round is that this category includes personal spending on services (such as healthcare and education) which both tend to be much larger in America and thus distorts comparisons.
Hence it’s not the best means to compare respective levels of consumer spending in shops. Chart 2 shows a narrower data set: total household consumer spending on goods alone. All in all, this may offer the best snapshot of China’s consumer revolution. And it reveals that the Chinese still lag behind their American counterparts when it comes to what they spend at the cash register or online.
Yes, the growth rate in households’ purchases of consumer goods has been particularly impressive since 2009. But at $2.3 trillion this spending remains a little over half the US equivalent which is $4.2 trillion.
So when we think of ‘true’ retail sales, the US remains comfortably top – with China’s headline data particularly skewed by the vast amounts that companies spend on items like cars and wine. It is this corporate spend that heavily inflates the figure that grabbed the recent headline in the Washington Post.
Of course, while such an apples and oranges comparison is misleading, it doesn’t undermine the overall trend: it is only a matter of time before Chinese consumers do outspend their US counterparts, just as it is all but certain (on current growth trends) that at some point China’s GDP will overtake America’s $19 trillion economy, and become the world’s largest.
Bloomberg’s website has quite an interesting interactive tool that charts just when this might occur. For instance, at its default setting – set at 2% GDP growth for the US and 6.5% for China – the crossover year is exactly a decade from today; however, change the assumption for a lower Chinese growth rate of 4.5% (and leave the US at 2%) and that date shifts to 2037.
Of course, a number of US and European hedge fund bosses have been wrongly betting on Chinese growth stalling to such levels (or lower) for years. They have been wrongfooted by the resilience of China’s growth and Beijing’s ability to keep the economy from crashing.
In another article this week the FT revisited this topic in its ‘Big Read’ section, asking whether these hedgies had “misread the country or were they just too early?”
That question remains to be answered but the FT did point out that those bears who had gone short China (such as Jim Chanos of Kynikos and Kyle Bass of Hayman Capital) “have mostly been forced to eat cold porridge”.
Indeed as the FT points out: “Betting against China was particularly painful last year. Investors that shorted Chinese companies listed in Hong Kong or the mainland suffered losses of more than $35 billion in 2017, almost half their stakes, according to New York-based data provider S3 Partners.”
Meanwhile if all goes to plan this year Beijing will add yet another Canada to the global economy…
The Bloomberg tool can be found at: https://www.bloomberg.com/graphics/2016-us-vs-china-economy/
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