Making Sense of Robust Chinese Industrial Production
Sept
Back in June I wrote on Chinese industrial production. At that time it was clear that stimulus was stabilizing the country’s economic output but was not yet fueling year over year growth (the primary means of economic measure for China). With another quarter of data behind us it is clear that Chinese factories in aggregate are outpacing their 2007 and 2008 production. Under the surface two distinct pictures emerge, though.
Chinese industrial output has returned to year over year growth. For a number of articles now I have been following the growth of four selected production categories. The numbers of automobiles, tractors, air conditioning units, and steel materials produced are released monthly by the Chinese Bureau of Statistics. I accept that many westerners are skeptical of Chinese reported economic data which is why I focus on lower level data like factory output. These four categories which include elements of consumer spending, exports, and infrastructure spending, had a decidedly negative tone at the beginning of the year.
Since then, though, a period of rapid monetary expansion through government spending and bank lending has Chinese factories humming again. All four categories have turned positive in year over year monthly comparisons but government efforts have been highly impactful on some categories and less so on others. The most robust of these is automobile production.
More than a million vehicles are now produced per month in China. Automobile production in August is more than 85% above the same month in 2008 with factories having turned out 8.46 million vehicles in the first eight months of this year. China produced over nine million vehicles last year and, at this pace, 2009 production is on track to eclipse that level when September numbers are reported. Such outstanding growth is corroborated by reports of aggressive bank lending in China and sales figures from the likes of General Motors.
Chinese factories are not just stockpiling ore but turning it into steel. In May I wrote about shipments of iron ore driving Australian-Chinese trade to record levels. This has since abated but remains at levels well above 2007 or 2008. Iron ore is one of the many raw materials reported to have been stockpiled in China during the first half of this year. But the chart above shows that this raw material is making its way into basic and finished steel products. Auto production explains part of this and infrastructure projects presumably explain the rest. The picture for consumer products and exports are decidedly less impressive through.
Other consumer items appear less vibrant. Air conditioners are a decent proxy for discretionary spending both in China and abroad. Such products are not generally funded by bank loans but paid out of consumers’ wallets. Production of these items faced a precipitous drop off in the fall of 2008.
Production naturally peaks ahead of summer in the northern hemisphere. In 2009, the production peak was not nearly as substantial as in 2008 but neither was the drop off. It is true that August year over year production growth was 55% but only because August ’08 represented such a steep drop from the prior month.
Thus, it is better to compare the seasonal pattern to a more normal year rather than to 2008.
Chinese production of air conditioners is behind 2007 pace. According to Chinese government figures, the economy is roughly 18% larger in the first half of 2009 than in 2007. In that two year period two though, some categories of production (such as air conditioners above) are struggling to keep pace with 2007 levels. Data for small tractors has this same pattern. In fact, year to date, two of the four categories are above that 18% growth level and two have negative growth:
|
Production Item
|
Units
|
2009
August YTD |
2007
August YTD |
2 YR Growth
|
|
Steel Products
|
10 000 ton
|
44008
|
36697
|
19.9%
|
|
Small Tractors
|
10 000 sets
|
123
|
131
|
-6.2%
|
|
Motor Vehicles
|
10 000 sets
|
846
|
593
|
42.7%
|
|
Air Conditioners
|
10 000 sets
|
5983
|
6692
|
-10.6%
|
Of course four categories do not represent the whole picture. Of the 69 categories of Chinese industrial production 17 have not seen even 1% growth in the past two years. Many of these categories are consumer and export items such as fax machines and computers. On the other end, 27 categories have grown more than 18% growth in the past two years. Most of these are materials related (copper, coal, steel, etc.) or infrastructure related (railway cars, hydropower equipment, etc.).
Some consumer/export related items such as refrigerators and washing machines are showing greater than average growth which reflects either growing domestic demand or greater competitiveness of Chinese made goods. Either way, this is more of the true long term result China would like to see.
Across the board industrial production for the first eight months of 2009 is roughly in line with the 6-7% GDP growth that China has reported for the first two quarters of the year. However, below the surface this is composed of two stories. One story is of stimulus-driven double digit growth in sectors like steel production and automobiles. The other is of languishing consumer products and exports, many of which have shown negative growth in the last two years.
The net result is an enviable picture of policy led growth but it is not one of Chinese domestic consumption saving the day for China or the world. None the less, it is easy to make the argument that government efforts have so far achieved the desired results, keeping the factories humming. The questions are: “What growth story going forward? Will spending on infrastructure and automobiles continue to grow at double digit rates until exports and domestic consumption picks up?”
Disclosure: No positions.