As China's downshift continues, investors should worry that the economy is in even worse shape than meets the eye.
Government figures for April paint a dreary picture, led by a slowdown in the all-important real estate sector. Housing sales this year through April have fallen 10% from a year earlier. Construction starts were down by almost a quarter. Fixed asset investment growth in April skidded to its slowest pace since 2002.
Retail sales, an imperfect proxy for consumer spending, grew by an anemic 11.9%, the slowest pace in three years. That adds up to a second quarter that is decelerating from an already sluggish first quarter, in which gross domestic product growth was 7.4%.
A bigger concern is that those GDP figures underestimate inflation, resulting in an exaggeration of real growth. Citigroup economist Minggao Shen says there is 'consistent evidence' that growth fell to as low as 6% in the first quarter.
He points to the government's GDP deflator, the number used to adjust nominal growth to the change in prices. The deflator has recently deviated from other measures of inflation, he says. This is at odds with a broader shift in China's growth makeup from manufacturing to services. The latter tends to experience faster price increases.
Whatever the true rate of growth, the Communist Party sees job creation as the ultimate measure of its ability to stay in power. The official unemployment rate has barely fluctuated in years and is widely ignored, as it only captures a slice of the workforce. Other measures show some parts of the labor market holding up. Online job advertisements in April were 81% higher than a year earlier, according to Zhaopin.com, a major online recruitment firm.
But employment may not hold up as the property market hits the rocks, given the mass of jobs it supports from construction workers to real-estate agents. Last week, Beijing pledged yet again to speed up construction of affordable housing, a signal the government sees a need to prop up this crucial sector. On Tuesday, the country's central bank urged more lending support for first-time home buyers.
Chinese policy makers have telegraphed for some time that slower growth is an inevitable part of its effort to reform the economy. Investors shouldn't be surprised by that. The question now is, exactly how slow is too slow?