The most common understanding of a recession is a contraction in
overall economic activity. A different way to view economic expansions
and contractions is to determine the relationship between consumer goods
and the higher orders of production. Relative increases in higher
orders of production indicate the business cycle is in the expansion
phase. Relative increases of consumption indicate the business cycle is
in the contraction phase. The mainstream and alternative view of
business cycles often align, but the alternative understanding of
business cycles allows for a better understanding of changes happening
within the economy.
Since the Chinese economic reforms that began in 1978, China has
never experienced a contraction in overall economic activity. Gross
domestic product, as it is officially reported, has never decreased from
one year to the next over this period. However, research into the
structure of production reveals that China has experienced multiple
periods of expansion and contraction.
The purpose of this blog is to be a source for an alternative view of
Chinese economic indicators to both reflect on business cycles in the
past and the business cycle as it unfolds in the present. Posts on this
blog will consist of reporting on main economic indicators as they
become available, links to news stories on current events, and special
articles on economic or financial events in the past. Two main economic
indicators will be referenced to determine the status of the business
cycle. The first indicator will be the relationship between purchasing
prices and consumer prices. The National Bureau of Statistics publishes
these monthly. The second indicator will be the relationship between
equity returns in the consumer goods industry and the materials
industry. These can be tracked by the Global X China Consumer ETF (CHIQ)
and the Global X China Materials ETF (CHIM).
A consumer price index is available back to January 1987. A
purchasing price index is available back to October 1996. With these two
data sets we can compare the relationship between purchasing prices and
consumer prices back to October 1996.
From the start of our dataset until September 1997, China was in a
state of contraction. This would correspond to the Asian Financial
Crisis, which according to official statistics, China avoided. The
production structure began expanding again only during the three months
of quarter four in 1997. However, it soon began contracting again as the
decline in purchasing prices outpaced the decline in consumer prices.
This trend began in January 1998 and continued for almost two years
until November 1999. Although gross domestic product did not decrease
during the Asian Financial Crisis, it seems China’s structure of
production was not immune from it.
Between December 1999 and March 2001, the production structure began
expanding again for almost five quarters. The length of this expansion
was shorter than the following period of contraction starting in April
2001 and lasting six quarters until September 2002. This corresponded to
the establishment of asset management companies to deal with
non-performing loans in the state-owned banking system.
The following period of expansion lasted for almost five years until
May 2007. This corresponds to the economic boom fueled by artificially
low interest rates throughout the world. China’s production structure
contracted for six months, starting in June 2007, similar to when the
rest of the world began experiencing the effects of economic recession.
Unlike the experiences of the rest of the world, China experienced a
period of expansion between December 2007 and November 2008. This was
followed by another twelve months of contraction.
Most countries officially exited the recession in 2009, which is the
same time China’s production structure re-entered a period of expansion.
This lasted until November 2011. Interestingly, between December 2011
and the end of this data set, China’s production structure has been in a
period of contraction. This is the opposite of the signals that gross
domestic product statistics are sending. Unfortunately for savers, in
addition to this being the longest period of contraction, it is also the
only extended contraction during our period that the rate of change in
consumer prices has not entered negative territory.
An exchange traded fund tracking the consumer goods industry (CHIQ)
was launched in December 2009, followed by one tracking the materials
industry (CHIM) in January 2010. We can use these to compute 12 month
growth rates beginning in 2011.
This dataset begins with China in a period of expansion, similar to our
previous indicator. The growth in earnings from CHIQ began to exceed
that of CHIM in May 2011. CHIQ increased by 19.12% while CHIM only grew
by 17.81% that month. In June 2011, CHIM outpaced CHIQ by growing 20.78%
against CHIM’s 14.00% over the previous 12 months. Soon, both began to
experience double-digit negative growth, although the decline in the
materials industry outpaced that in the consumer goods industry. This
period of contraction continued until May 2014. Although the consumer
goods industry recovered during the later part of this period, the
materials industry was in negative territory almost every month.
Unlike the relative price index trend indicator examined above, the
relative equity earnings trend indicator showed China’s production
structure in a state of expansion starting in June 2014. We are most
likely seeing a drop in consumption in order to finance higher orders of
production.
Why am I starting this project now? Because 2014 was the first year
in 20 years that the Chinese yuan depreciated against the U.S. dollar.
It is a sign of bigger things to come.
The expansions and contractions in China’s structure of production that
are revealed by these indicators correspond to regional or global
recessions, such as the Asian Financial Crisis or the Great Recession.
However, gross domestic product, as officially reported, has expanded
every year since economic reforms began. Eventually, we can expect
fluctuations in China’s gross domestic product to correspond to changes
in the structure of production. This means that China’s gross domestic
product will also experience a decline. Considering that both of these
indicators have experienced the longest period of contraction seen so
far during this period, China will most likely experience negative gross
domestic product growth in the very near future.