Electricity Use Seen Overstating China Economic Slowdown
A stagnation in electricity output that fanned speculation China’s slowdown is intensifying may instead be evidence of an accelerated transition to a more services-based economy.
The government will release information on July electricity production tomorrow as part of its report on industrial output. Power generation in June was unchanged from a year earlier even as industrial production rose 9.5 percent. Heavy industries including metals and cement consume about 60 percent of electricity and account for 20 percent of gross domestic product, according to GK Dragonomics, a Beijing-based consultant.
The shifts signal that electricity’s relevance as an economic indicator is receding five years after Li Keqiang, now the vice premier, was quoted as saying he watched data on power, rail cargo and loans because GDP numbers were “man-made.” An evolution within manufacturing to more efficient production is also damping electricity use as China upgrades its factories.
“Steel plants, cement plants and refinery facilities -- these big electricity consumers -- have suffered a lot more than service-industry players in the first half,” said Dong Tao, Credit Suisse Group AG’s Hong Kong-based head of Asia economics excluding Japan. “So electricity consumption is not a benchmark but a reference.”
Figures released today by the State Electricity Regulatory Commission suggest power-output growth may have rebounded in July. Production was 453.7 billion kilowatt-hours last month, which if confirmed in tomorrow’s official data from the statistics bureau, would be 6.7 percent above a year earlier.
Industrial production probably rose 9.7 percent in July from a year earlier, based on the median estimate in a Bloomberg News survey. Data tomorrow may also show consumer inflation decelerated to 1.7 percent in July, the weakest pace since January 2010.
Profits at Chinese steelmakers fell 96 percent in the first half as demand and prices dropped, a China Iron and Steel Association official said last week. Anhui Conch Cement Co. (914), China’s biggest maker of the material, said in June that first- half earnings may have dropped by more than 50 percent.
Some companies in service industries, by contrast, are seeing faster growth. The U.S.’s Yum! Brands Inc. (YUM), operator of KFC and Pizza Hut restaurants, said second-quarter “system sales” in China rose 27 percent and boosted the number of planned store openings in the country this year. Starwood Hotels & Resorts Worldwide Inc. (HOT) said first-half China sales rose more than 25 percent.
A survey of purchasing managers indicated that manufacturing teetered on the edge of contraction last month, with a government gauge at 50.1. The official services index was at 55.6; readings above 50 signal expansion.
Service industries now account for about 43 percent of the economy, and China’s government is trying to boost that to 47 percent by 2015.
More broadly, electricity is a “powerful indicator, but it’s just volatile on a month-to-month basis,” said Michael Parker, senior analyst at Sanford C. Bernstein & Co. in Hong Kong. Reviewing two years of figures gets a power-consumption growth rate of about 7 percent, “which is about consistent” with GDP expansion, he said.
China’s statistics bureau publishes power output data while the National Energy Administration releases consumption figures.
The country divides its economic data into three segments: primary industries, which include agriculture and livestock; secondary, comprised of manufacturing and construction; and tertiary, which includes services and logistics. Electricity consumption in secondary industries grew less than 5 percent in each of the four months through June compared with 10 percent to 14 percent during the same period in 2011, government data show. The primary group’s consumption fell from a year earlier in March, April and May.
The tertiary group’s power consumption, by comparison, grew more than 10 percent from a year earlier for most of the first half.
“The popular idea that electricity growth is a simple proxy for economic growth is clearly not true,” said Nate Taplin, an energy analyst with GK Dragonomics in Beijing. Li’s remark was published in a WikiLeaks cable in late 2010.
Investor concern over China’s growth has helped send the benchmark Shanghai Composite Index (SHCOMP) down 15 percent in the past year. The yuan has weakened about 1 percent against the dollar in 2012.
The stall in electricity output is among conflicts in China’s economic data that show the nation’s growth may be overstated, Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong, said in a July 17 report.
The government cut interest rates in June and July, the first reductions since 2008, and signaled it’s focusing on investment to support expansion that slowed to a three-year low of 7.6 percent last quarter. Premier Wen Jiabao set a 2012 target of 7.5 percent in March.
“Activity growth has probably stabilized on the back of the policy loosening which started in May,” Goldman Sachs Group Inc. economists including Song Yu wrote in an Aug. 3 note. Slowing inflation will allow room for more easing, Song said.
The electricity-output slump results from the economic slowdown as well as a longer-term shift away from energy- intensive growth in China, Parker said. Even so, the nation may still have a ways to go.
“There are some energy-efficiency benefits coming through the economy that will continue,” Parker said. “But it’s a little bit of a reach to suggest that China has effectively gone from being Indonesia or Egypt in June of last year to becoming Switzerland or Sweden this year.”