China Activity Proxy signals much weaker growth than official GDP data

• The CAP is our proprietary tool to track the pace of growth in China without relying on the official GDP figures. It is based on low-profile indicators chosen to reflect activity across a wide section of the economy. 
• Our preliminary estimates suggest that China’s growth jumped from 3.5% y/y in November to 4.7% y/y in December. (See Chart 1.) That was likely driven by a pick-up in fiscal outlays in December. Still, this uptick was only enough to drive a modest improvement in Q4 as a whole, with growth picking up from 4.1% y/y in Q3 to 4.3% in Q4. As a result, the economy grew by a relatively disappointing 4.4% in 2024, weaker than our forecast of 4.5%. This comes in stark contrast with the official figures. Official GDP rose sharply in Q4, beating consensus expectations and helping the economy achieve 5.0% growth in 2024, (conveniently) in line with the government’s growth target.
• CAP sector proxies suggest that December’s improvement was broad-based across sectors. (See Chart 2.) Fiscal support seems to have had a big impact on the construction sector, which saw a modest expansion in December after several months of weakness. (See Chart 3.) That said, our construction proxy still suggests that the official measure of construction is significantly understating the sector’s weakness. And this uptick is unlikely to be a sign that the sector is starting to undergo a meaningful recovery. Construction has underperformed the rest of the economy by a large margin since the end of the pandemic, with the government propping up the sector by investing in social housing and infrastructure. We expect the sector to contract substantially over the long-run as demographic headwinds intensify and fiscal support starts to fade. 

Chart 1: Capital Economics China Activity Proxy & Official GDP (% y/y, seas. adj.)

Chart 2: CAP – Sector Proxies (% y/y, seas. adj.)	Chart 3: CAP Construction Proxy and Official GDP Construction (% y/y, seas. adj.)

• Industrial activity also expanded last month, helping to further fuel the sector’s outperformance. (See Chart 4.) This reflects the continued strength of exports, which posted double-digit gains in December, rather than strong domestic demand. Indeed, exports have been essential in driving the economy’s growth over the past year as the imbalance between China’s weak domestic demand and strong investment has led to a surge in China’s export market share. However, we don’t think this growth in market share will last. If President Trump follows through with his threat of penal tariffs on China, they will drag on China’s exports, weighing on the economy’s industry. 
• Finally, services activity picked up in December, but not by enough to reverse November’s fall. In contrast, official activity data show that services activity has been accelerating steadily for most of the year. (See Chart 5.) This divergence suggests that the government is struggling to meet its targets around boosting domestic demand, despite its recent emphasis on supporting consumption.
• The headwinds facing China’s economy only seem set to intensify. While we do expect fiscal loosening this year, the last few months of 2024 have demonstrated the difficulty of the task facing policymakers. Without a substantial pivot towards demand-side measures, fiscal support may not be enough to drive much of a turnaround in consumer demand. Even then, any boost to growth will likely be short lived. Meanwhile, with trade barriers only set to intensify, export growth is likely to slow. Against this backdrop, and given the disappointing outturn for 2024, we’re revising down our growth forecast for 2025 from 4.3 to 4.0%. And as China’s economy slows and growth targets become further out of reach, we expect the CAP and official GDP to continue to diverge. 

Sources: CEIC, NBS, WIND, Capital Economics ​