China's August economic data, to be released starting this week, will be especially critical for the prospects and perceptions of the country's transition.
Beneath the yuan's stability of late, worries about the Chinese economy are rising, and central to the concern seems to be the crash in private fixed-asset investment (FAI) since late 2015: two consecutive year-on-year contractions in June and July have capped off a sharp plunge from about 10 percent growth to below zero since December.
The data are probably skewed, however: the government's heavy-handed intervention in the stock market since the mid-2015 crash - overall it has spent anywhere from $150 to $300 billion buying shares to prop up their prices - has caused many firms to be reclassified from "private" to "public" since H2 2015. And considering the market and currency woes which began 2016, heavy state ownership of stocks has persisted and isn't likely to substantially recede: indeed Chinese equities, especially the traditional industrials of the Shanghai Composite, for all practical purposes appear to be stuck on state support.
So the apparent crash in private investment isn't all it's cracked out to be: it's not as unequivocally indicative of a general loss of business confidence as first meets the eye. And considering that the distortion caused by the aforementioned redesignation of firms only started in July last year, we can expect to see some rebound in private FAI going forward. But if the August FAI figures are likewise moribund, it would raise serious questions about Beijing's hopes of withholding further stimulus until the Q1 2016 one works its way through the real economy.
If FAI doesn't recover or even continues to decline, that would put tremendous pressure on other data points, especially consumption and services growth and PPI. The former can only be expected to decline, too, but hopefully not as precipitously because the Chinese economy will be even more dependent on it; the latter must be seen to further normalize towards zero (having already improved from deep negative territory, -5.9 to -1.7 percent YTD) as an indication that less FAI eases the overcapacity situation. With both investment and consumption growth slowing further, however, that also reshines the spotlight on net exports: they've been lousy since H2 2014 but this has been compensated by a persistently strong internal investment and consumption backdrop (if even also decelerating). Now that things are slowing domestically, China needs more of a boost (and more persistently) from trade. It has helped that although exports have been flat or declining, imports have suffered even more: that's helped the net export contribution to GDP, but it's unlikely to be boosted enough to counter the looming domestic investment and consumption shortfalls.
That means PBOC and Xi Jinping may have to make the difficult choice between more stimulus and missing the GDP target for H2 2016. Doubtless Xi will also seek to accelerate stalled reforms in the most troubled regions, especially pertaining to touchy social issues like migrant workers' urban residency rights, which are hampering real economic activity; but this will be a function of the state of party politics and Xi's confidence that he can ram through tough changes that steamroller vested interests.
The ironic thing about China's present juncture is that both greater control and greater freedom are needed simultaneously - and both increasingly urgently, especially if the August data undershoots as the July data did. The central government needs to be able to turn off the credit taps to unproductive state firms and regional administrations as quickly and efficiently as possible, and the central party leadership needs to assert control of provincial and local parties as efficaciously as possible to force streamlining and restructuring of their local economies on a macro, top-down basis. The net effect of such reform, paradoxically, will be to free up individual economic agents and actors on a micro, bottom-up basis, be it migrant workers finally gaining access to urban education and healthcare, or farmers finally gaining commercial sale rights over their land, or more broadly private consumers and businesses everywhere experiencing everyday tax and regulatory relief along with easier credit (within reasonable bounds).
In any event, with the G-20 in Hangzhou coming at virtually the same time (September 4-5) as the August economic data, the stakes couldn't be higher for China either to deliver on performance expectations or better communicate the nuance of its reported metrics. Most likely a combination of both.
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