Can China pull a rabbit out of the hat?
This post is a guest contribution by Niels Jensen*, chief executive partner of London-based Absolute Return Partners.
Many moons ago, long before I joined Goldman Sachs, a London based employee of the firm went to Chicago to attend a seminar on options and futures. This goes back to the 1970s when proper men still wore hats, and our friend was indeed proper, so he showed up in Chicago in full British-style attire, including his beloved woollen hat. Lo and behold, Chicago can be a very windy place and, shortly after arriving in the Windy City, his hat blew off and was completely flattened by a passing car.
Our friend thought it reasonable that Goldman reimbursed him for his loss so, after having acquired a new hat, the cost found its way to the expense report, which he submitted on his return to London. In those days Goldman was quite a small firm, and expenses were controlled with an iron fist by one very senior person in New York, who shall remain unnamed. When he saw the expense report, he went ballistic and immediately demanded for our friend to re-submit his expenses, this time without the hat.
Now, our friend was not giving in that easily. He was truly upset about the loss and only found it fair that Goldman compensated him, so he re-arranged his expenses, with the total adding up to the exact same amount, but the hat had mysteriously disappeared. Then he wrote in big fat letters across the expense report: “Find the Hat!”
For reference only
So let’s do precisely that. In chart 1 below I have plotted Chinese GDP growth against the electricity output over the past 15 years, and an interesting pattern emerges. During periods of low economic growth (the Asian crisis in the late 1990s, the US recession in 2001 and the global credit crisis in 2008-09), GDP grows much faster than the electricity output. Conversely, during periods of strong economic growth (2002-07 and 2010), GDP growth is lower than the power output. Clearly the GDP numbers are massaged.
Chart 1: Chinese GDP vs. Electricity Consumption
Digging one level deeper reveals something rather more serious. Assuming the electricity stats tell the true story, and that the GDP numbers are ‘for reference only’ (remember, not my words!), China’s economy experienced a dramatic slowdown as 2010 progressed (see table 1). Total power consumption (year on year) grew by a whopping 22.7% in Q1 last year but only by 5.5% in Q4. The slowdown in Q4 was in fact so dramatic that the power output dropped 6.3% quarter on quarter! There were some restrictions in place on the use of electricity in Q3 and Q4 which did have some impact, but those restrictions were dropped in November, so it cannot be the only explanation. This story is largely ignored by the sell-side banks, most of whom have no interest in offending their new pay masters.
Inflation is taking off
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* Niels Jensen has 26 years of investment banking, private banking and asset management experience. He founded Absolute Return Partners LLP and is its chief executive partner.
Source: Niels Jensen, Absolute Return Partners LLP, February 2011.
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