China's test fires a Long March 5 carrier rocket earlier this year. Soon it will launch its first reusable rocket. Photo: AFP
China's test fires a Long March 5 carrier rocket earlier this year. Soon it will launch its first reusable rocket. Photo: AFP

There is a truly amazing story about China’s GDP that blew my mind away. The world’s most populous economy didn’t just expand by the reported 6.9% growth during the first quarter of 2017, it actually ballooned nearly 12% from a year ago!

Yet at the same time, the agrarian sector in the Communist nation is undergoing the worst contraction in the past 25 years.

China’s gross domestic product reached 18.07 trillion yuan (US$2.6 trillion) in the first three months of this year, the country’s National Bureau of Statistics reported on April 17.

In other words, the Chinese economy generated nearly two trillion yuan more this quarter than Q1 of last year when the GDP figure came in at 16.16 trillion. That calculates to a massive gain of 11.8%.

Before jumping onto the All-China-Data-R-Fake bandwagon, there is a perfect explanation to all these vastly different growth figures, found conveniently in the land of economic wizardry.

The 11.8% rate is the so-called growth in “nominal” terms or more simply the difference in compiled GDP sums without taking into account any change in prices over time.

On the other hand, the widely reported 6.9% Chinese GDP growth during Q1 is in fact an inflation-adjusted “real” growth, computed by a group of truly brainy statisticians to effectively describe the pace at which widgets are being churned out by the Chinese economy.

So which growth rate should one look at, the real or the nominal? For investors who make their buy-or-sell decisions on corporate earnings expansion, as well as surprises in the overall turnover and bottom line, they are really dealing with financial performance in nominal terms.

This is a good enough reason to closely monitor changes in China’s nominal GDP growth, especially when the real pace of growth is not really fluctuating that much in the most recent quarters – 6.7%, 6.7%, 6.7%, 6.8%, 6.9% – you get the point.

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In nominal terms, China’s growth bottomed out in the final quarter of 2015 when it humbled to just 6.4% from nearly 20% in 2011. Growth has been accelerating at a very steep trajectory during the past five quarters leading up to 11.8% of the past three months.

Real GDP growth has been much more steady, to say the very least. That showcases the power of the price changes over time.

In the case of China’s primary economy, slumping crop and pork prices, as seen in the plunge in food inflation in recent months, coupled with a very tepid 3% growth in produce volume, translates into the harsh reality that farmers have generated less GDP this past quarter than a year ago.

Not only so, the minus-1.7% contraction is the worst plunge since available data going back to 1992. The second largest year-over-year decline, minus-1.2%, occurred in the fourth quarter of 1999. No happy farms here for sure.

The industrial-driven secondary sector, has almost the opposite picture with nominal growth surging to 14.2% during the latest quarter, following a dangerously close encounter with contraction during the second half of 2015 when the growth was barely visible at 0.9%. This is as vivid a picture as one gets showcasing a full-blown industrial-led recovery in China since early 2016. It’s the rise of the machines.

Finally, China’s tertiary sector, now the largest chunk of the economy at 48.5% of nominal GDP in 2016 and expanding, has had a less volatile growth profile in recent years.

It is clearly benefiting from a more steady level of demand and price increases. Its nominal growth is currently between 11% and 12% while the real growth fluctuates at around 7.7%.

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