Breaking down the latest GDP figures just a bit

Gordon Chang is at it again - he who claimed China would utterly collapse in the early 2000s is now pretty much saying that Beijing has managed to fudge a whopping $600 billion of economic growth out of thin air over the course of 2015, i.e. 1 percent GDP growth in FY 2015 as opposed to the reported 6.9 percent, on top of a roughly $10 trillion economy in 2014. Now that would be quite a feat, even for a communist dictatorship.

The basis of the "1 percent growth" argument is the following falsehood:

The usage of electricity remains the most reliable single indicator of Chinese economic activity. In the first 11 months of 2015, electricity consumption increased 0.7%.

Of course, Gordon didn't bother breaking down this figure, which is in fact an even worse 0.5 percent increase reported for FY 2015. But the breakdown is highly illuminating: the slow growth is entirely due to a minus-1.9 percent contraction in electric usage by heavy industry, which still accounts for nearly 60 percent of all consumption. Robust growth in residential consumption (5.0 percent) and tertiary industry (i.e. services, 7.5 percent) is entirely consistent with China's rebalancing that now has more than half of all national output contributed by the services sector.

The contraction in heavy industrial electric consumption isn't such a bad thing, either: it reflects long-overdue efforts to cut down on overcapacity and inefficient production in this bloated sector that's become the biggest drag to the Chinese economy - not to mention the main culprit behind the Apocalyptic levels of pollution (coal power).

That being said, it does seem odd that industrial production can have grown 6.2 percent on year given that industrial electricity use - heavy and light industry together - declined by 1.4 percent. The easy explanation for this at a high level is that light industry, comprising predominantly finished manufactured goods, is still growing at a healthy clip even as heavy industry, dominated by bulk commodity products (steel, cement, glass, etc.) is crushed by production cutbacks, large inventories to draw down, and deflation. The former needs only a fraction of the energy input of the latter to generate the same monetary value of output. A reasonable guess is that heavy industrial output grew about 1.5 percent as electricity consumption fell by the reported 1.9 percent, whilst light industry grew 8 or 9 percent as electricity consumption grew the reported 1.3 percent.

This would be in keeping with China's significant gains in energy efficiency, with energy intensity per unit of GDP steadily declining for years; a 2 or even 5 percent decline in electricity consumption need not be mostly attributed to production declines. Granted, China still has a long way to go to reach the energy efficiency of advanced OECD economies (the recent "airpocalypses" in Beijing, Shanghai, Hangzhou, and at least 20 other major cities were embarrassing reminders) - but this is precisely what should be kept in mind as we see further stagnation or decline in secondary industry's power consumption that belies its continued output growth.

Interestingly, as a bellwether for the intersection of heavy and light industry, the automotive industry saw an appropriately in-betweenish 3.3 percent output increase in 2015, to include a bullish 5.8 percent increase in the dominant, consumer-driven passenger vehicle sub-segment.

More detailed breakdown analysis of FY 2015 and 4Q GDP will be forthcoming in the coming days, but it's already clear from this exercise that China bears keep their criticisms of official Chinese data's inconsistencies too general and high-level to be taken at their word.