China’s economy in Q2 grew 7% from a year earlier, hitting policymakers’ growth target for 2015. The latest GDP, retail sales, and industrial production reports exceeded consensus forecasts, highlighting once more Beijing’s capacity to match market expectations.
Claims that China is fabricating its macroeconomic statistics are, of course, hard to verify. Attempts to construct “independent” gauges typically put aggregate growth one to two percentage points below the official figure, but it’s not clear whether the “fantasy gap” is widening.
The Q1 numbers looked especially iffy. With real growth of 6.95% and nominal growth of 5.82%, Chinese statisticians were implying that there was broad-based deflation of 1.05%. But consumer prices over the same period rose 1.2%. However, producer prices have been falling. The GDP deflator measure of inflation, which had exceeded the CPI and PPI through the fourth quarter of 2011, has lagged CPI since then, perhaps because of changes in the composition of the GDP basket. But it’s unclear why now and why so fast. The counterpart of an understated GDP deflator is an overstated real GDP.
That is not to deny that inflation is unusually low. Nonfood prices rose just 1.2% in the year to June, whereas telecom and transportation prices continue to fall. Producer prices fell for the 40th straight month, and now deflation runs at 5% a year, dragged down by commodity prices.
Growth of total credit fell in the first half of 2015 from a year ago, due to a massive contraction of non-bank loans—reflecting efforts to temper shadow-sector lending. Net corporate bond issuance also receded. Bank loans, on the other hand, grew by 7%, which is a small number considering how much other forms of lending were contracting.
The People’s Bank of China cut its policy rate twice in Q2, by a total 50 basis points. Added to the targeted reductions to required reserve ratios, the PBoC engaged in significant monetary easing last quarter. Part was due to the stock market crash, but over a longer period of time low inflation has kept real interest rates high, forcing the central bank to compensate with lower policy rates. Further easing is likely in 2015, as inflation is running below policymakers’ goal and growth is barely adequate—if we believe the official number.