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CHINA: "Applying a Fit for Growth approach in China: Implications for Chinese players and multinatio

CHINA: "Applying a Fit for Growth approach in China: Implications for Chinese players and multinationals" report. 20-page report by Strategy&.

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back to index backCHINAtalk February,  2005


China: Deciphering the Official GDP Release for 2004

According to the National Bureau of Statistics' (NBS) GDP release on January 25, China's real GDP for 2004 rose 9.5%, up from its 9.1% growth in 2003. In the fourth quarter of 2004, growth accelerated to 9.5% year over year, up from 9.1% in the third quarter. Nominal GDP for 2004 reached 13.65 trillion yuan ($1.65 trillion).

Investment and exports continued to lead the way. Fixed asset investment surged 25.8% in 2004, reaching $846 billion. Exports rose 35.4% to $593 billion, while imports surged 36.0% to $561 billion. The trade balance remained in surplus, at $32.0 billion, $6.5 billion more than 2003. Retail sales, a proxy for private consumption, rose 13.3% in nominal terms, totaling $581 billion.

Inflation picked up in 2004. Consumer prices rose 3.9% during the year, 2.7 percentage points above the 2003 rate of inflation. Rising consumer price inflation was mainly due to surging food prices, which shot up 9.9%. Producer prices (excluding the factory price index) climbed 6.1% in 2004, the result of higher energy prices and overheating in the materials-producing sectors such as steel.

Actual real GDP growth was probably much higher than the reported 9.5%. According to the NBS, real retail sales—a proxy for private consumption—rose 10.2% in 2004. The bureau also reported that fixed asset investment prices rose 5.6% in 2004, which implies real fixed investment growth was 20.2%. With private consumption and fixed investment each accounting for around 45% of GDP, these two demand components lifted real GDP by a respective 4.6% and 9.1%. So, household consumption and investment together would have raised GDP by 13.7%.

Moreover, the nominal trade balance in 2004 was in surplus, lifting nominal GDP by 2.3%. In real terms, the impact of the 2004 trade surplus was probably even larger—most of China's imports are raw materials (such as crude oil, of which China is a net oil importer), and material prices surged last year. And it is unlikely that China's service trade deficit and inventory depletion were large enough drag down GDP growth to 9.5%. Finally, with China's over-investment, inventory changes are likely to have been positive, rather than negative, which further adds to GDP growth.

This higher actual growth does not mean that China has an out-of-control economic overheating that threatens an imminent hard landing. Indeed, deflationary forces abound in China's economy. Nonfood consumer prices' zero inflation through this overheating cycle is a prime example. As a result, the central government has been quite measured in its attempts to dampen growth, fearing that excessive braking of the economy could revive deflation and undermine domestic demand. Furthermore, there are signs that Beijing had relaxed its austerity measures in the fourth quarter. Interestingly, after the central bank hiked interest rates in October, money-supply growth actually reaccelerated. With the government easing the brakes, and external demand still healthy, the Chinese economy's strong growth momentum should carry far into 2005.

Source: Todd C. Lee of Global Insight ( www.GlobalInsight.com ) - GAI


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