Niels Jensen Asks If Plunging Chinese Power Output Is Indicative Of A "Dramatic Economic Slowdown"

Tyler Durden's picture

The latest letter by Absolute Return Partners' Niels Jensen is a must read for anyone still on the fence about the Chinese "thesis." With many prominent pundits pitching either side of the China bull/bear case, often times covering up weaknesses in their arguments with extended and superfluous rhetoric, sometimes it gets easy to get lost in the noise: here is where Jensen's ability to create signal shines through. Jensen starts off with the official revelation that Chinese GDP is a made up number, discussed previously on Zero Hedge. "In a leaked 2007 cable Li Keqiang, who is the favourite to become the next premier, confided that official Chinese GDP figures are “man made” and “for reference only” (surprise, surprise), and that one should rather look at alternative measures such as electricity consumption, rail freight volumes and bank lending, if one wants a true picture of economic growth in China." It is all downhill from there.

First, looking at trends in Chinese power output, indicates that the Chinese economy very likely fell off a cliff in 2010 despite what the fabricated GDP number was indicating:

Here is ARP's take on this collapse in the one metric that actually does matter:

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. 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

Yet while economic growth does not lead to revolutions, surging price inflation does. So what does China do? Pull a page straight out of the BLS playbook, and minimize the impact of food on CPI!

Turning to inflation, a similar picture emerges. According to the official stats, Chinese consumer price inflation moderated to 4.6% in December, down from 5.1% in November. However, anecdotal evidence suggests a much more serious problem, in particular in the largest cities, where actual inflation is running close to 20% according to my sources.

As I prepared for this letter I received an email from China specialist Simon Hunt, who notified me of the fact that the National Bureau of Statistics of China has just announced that the weight of food in the consumer price index has been reduced as of 1st January. In an emerging economy such as China, where 35-40% of disposable income is spent on food items, sharply rising food prices are actually likely to lead to food accounting for a higher percentage of overall disposable income, so the Chinese reaction defies all logic. There can only be one motive: to cook the books. The CPI numbers appear to be as rigged as the GDP numbers.

I don’t really know whether actual inflation is currently running at 8%, 10% or possible even higher. All I know is that it is a much bigger problem than the official numbers suggest.

Which is why, as we have been advising since October 2010, the easiest global central bank put is to push the accelerator on the rice trade. This, at least to China, is the end all be all, and why just like in Europe the bond vigilantes woke up just as it was made clear how insolvent the continent truly is, so shall the price of rice surge once it is made apparent to the entire world just how close to the edge China and its 1.3 billion really are.

And lest anyone believe that the PBoC was the only bank that did not engage in artificially stimulative QE, here is a chart from SocGen, via ARP, debunking that foolish notion:

Bottom line:

As a result of the above, the Chinese leadership currently finds itself in a bit of a pickle. On one hand, indications are pretty clear that the economy is at grave risk of overheating. On the other hand, the transition of power from current President Hu Jintao and Premier Wen Jiabao to the next generation of leaders is fast approaching. Although the National People’s Congress, where the new leaders will be officially instated, is not taking place until March 2012, the new power structure will almost certainly become apparent to the outside world at the next party congress, scheduled for October of this year.

Given the importance of this changeover and the significance the Chinese assign to not losing face, the leadership will do anything in its power to maintain the economic momentum until after the March 2012 congress. This increases the probability that the Chinese monetary authorities will fall further behind the curve in the months to come and make the landing so much harder when it ultimately happens.

While there is much more in the full letter below, the key focus is on items relating to commodity price inflation. It took cotton one month to jump 28%. This will make its way through the price chain and impact both Chinese margins and personal incomes, and eventually do the same here in the US. Then add all other commodities, and please ignore any stupefying explanations from the Steve Liesmans of the world how wheat prices surging is actually irrelevant for the price of bread.


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Cursive's picture

Power consumption in the US is also still way down. I'd link an article about AEP, but too hard on this i-phone.

Rainman's picture

I have heard rumors that uninhabited structures require far less power. 

egdeh orez's picture

Are these power numbers year-over-year? If so, then it's not too surprising.

1Q10 energy consumption growth is obviously going to be super high compared to 1Q09, since the economy fell off a cliff then.  By 4Q09, I would imaging the energy consumption had recovered, meaning growth in 4Q10 would not be as high.

StychoKiller's picture

Yeah, ghosts don't need to turn on lamps due to their own luminescence, nor are they washing their ectoplasmic sheets! :>D

Cursive's picture

And remember - electricity usage is absolutely realtime - there is no inventory component. The only skew would be waste of unnecessary usage.

tonyw's picture

What makes you think the electricity figures are genuine? Remember they only revealed huge increases to their gold stores after several years. I would put no more value on any figures from China than that. They will tell you what they want you to hear.

Likewise Mubarak has "no idea" where the thugs came from, yeah right! He'll go real soon now just go home and calm down so he can send his guys out to kill and arrest them.

The only way you will ever get reasonable jobs back is to introduce a large import tax on Chinese goods. If not then bye bye America.

MrSteve's picture

Mark J. Lundeen has been keeping electrical production stats from Barron's, doing amazing work. see his work, below, in the section on Electrical Power.

Bearster's picture

You mean central planning of the economy by the State doesn't work?

I know... what if we break a lot of windows, that would stimulate the economy right??

snowball777's picture

Do me a favor. Go count the number of things in your house that say "Made in China" on the bottom (yeah, everyone thinks they're the one person buying American, but that's been an impossibility since about 1996). Then go look at the dollar reserves and treasuries sitting in China. Clearly letting global capitalists export American jobs overseas was a big win for the US, huh? Now STFU and go sit in the corner until called.

tmosley's picture

I don't really see where either of you were wrong in your sentiment.  Your points are mostly tangential.

The one place I would disagree is where you say our jobs were "exported".  This is no more true than the assertion that China "exported" their population growth to America or elsewhere with their one Child policy.  Fact is, we DESTROYED the productive jobs here in America with taxation and regulation.  New factories opened in China and took jobs producing goods for consumption in America, because the government continued to subsidize our consumer sector.  Those factories would have opened with or without the destruction of American productive capital.  They would just be making different things.

You can argue that the dollars they received for their goods allowed them to build their industrial base, but this is clearly not the case, as they NEVER SPENT THEM.  They are sitting on that giant hoard of foreign reserves rather than using them to buy goods and services from the rest of the world, especially America.  You can't build a factory by burying dollars in the ground, no matter how many you pour in there.

patience...'s picture

"Fact is, we DESTROYED the productive jobs here in America with taxation and regulation" 

true but also add a heavy dose of corporate greed to the mix.

snowball777's picture

Well then I'm projecting that I'll have 25% growth YoY. See how easy that was?

Jason T's picture

they have all our manufacturing jobs.. except those that make weapons.. any way.  high speed rails, nuclear power plants, and before we know it, sending man to Mars.  


All we have is rhetoric about WTF

AntiMort's picture

It would be nice to see a comparison to 2009 power consumption so we could dismiss the seasonal variation argument.

VFR's picture

Interesting but no surprises. but no problem soon we will be able to grow more crops when Betelgeuse goes supernova and provides the Earth with a second sun. In fact I reckon the stock and commodoties markets have already built this in .

Flakmeister's picture

  Betelgeuse going is one thing that I hope happens in my lifetime, it will be the greatest fuckin show on earth...I'm pissed because Halley's comet was a disappointment this time round (at you only get one crack at that one)

It is also far enough away that it will be safe from a radiation standpoint. Won't do much much for the growing season though, it'll fade quickly (~60 days)

SilverRhino's picture

Check out Gamma Velorum if you want to see something interesting that could go boom. 

Flakmeister's picture

 Will do....

Damn... southern hemisphere...  Wolf-Rayet stars are fascinating objects

ageofreason's picture

The problem with that is that we won't know until probably a couple years after it we can't play the futures...

HelluvaEngineer's picture

The "market" appears to be broken this morning.  What's going on?

SumDumGuy's picture

Must be a lot of snow in China.

jharry's picture

Hmm.  Most interesting set of metrics for any economy.  I guess we just watch China crash and then buy the bottom. That's what Gary North suggests.

Bob's picture

QE3 is gonna be a bloodbath. 

Rogerwilco's picture

Didn't you hear the news? It is possible to push on a rope, as long as you piss up the rope first, and then freeze it. QE3 will demonstrate this amazing breakthrough in rope-pushing technology.

waldocktrades's picture

I've also read that letter and have been using different data to arrive at the same conclusion. We wrote about it last week.

apberusdisvet's picture

Mao's record of 200 million deaths will soon be broken by Ben, along with cheers at the FED:  "we're #1, we're #1.


This data and graph must be in currency paid for electricity not actual electricity produced. In an economic system where the state can push the cost of electricity up or down at their whim (or lie about the figures at their whim) this data and graph aren't worth squat. I'd like to see a graph of actual electricity produced. Even then the figures from the Chinese government (or any government for that matter) could not be taken seriously. This story is totally 100% useless.

LehmanRefugee's picture

I think this a production constraint (supply side). New power plant capacity has not kept up with demand. You can "google news" stories of a 6GW expected shortage in south china provinces this year. Anyhow, this doesn't take away from the investment thesis here: reduction in growth of power consumption (regardless if it comes from supply side or demand side) will lead to lowering of GDP growth rates.


Mad Max's picture

Hey guys-

China took advice from Leo and Harry, and put everything in solars.  They are now able to generate the same 10% GDP growth with only 1/4 the electricity, and did that all in just a year.  We really should sit back and learn from them.  We too can have 10% GDP growth next year with only 25% of our current power usage!


ageofreason's picture

Problem is that those solar cells say made in China, so they are ineffecient and will probably rust and fall apart in a couple of months....

Overflow-admin's picture


Even in Switzerland my electricity provider discloses only 0.07% is solar (did I miss a 0?). At least here they didn't cook the books (but >80% electricity input is reported as *unknown electicity source*).

Bad times...

americanspirit's picture

Poor people can't buy food. Not that they 'can't afford it"; they can't buy it period. Zero money. Of the 104 million children under 5 who die each year, over half die of protein energy malnutrition. Not enough food, too much leaves and dirt in their swollen little bellies. Lots of numbers tossed around, but only one really matters - 52+ million children die every year because they don't get enough to eat. And Lord knows how many hundreds of millions are crippled for life by chronic PEM. Talk about a holocaust. That's a lot of little bodies lying at Bernanke's feet. This man is literally a monster.

gwar5's picture

Maybe communism isn't so bad.

If you can make up the economic numbers so they are perfect then everybody is happy. Looking good is always better than feeling good. Why should they get people upset over nothing? Never give people news that might make people unhappy. That is the key to Utopian Mysticism and why it is so successful.....

Mad Max's picture

Some arguments against communism as it has been practiced:

North Korea today


Josh Randall's picture

Ghost cities using no energy means the rats can run amuck in them in the dark

Ancona's picture

A radical reduction in power usage is an absolute indicator of something out of whack. If they have cut their usage by half, it stands to reason that manufacturing has either slowed or, in some sectors, stalled.

This is not good.

Bear's picture

No ... I think it's Leo's solar panels finally arriving to market.

Catullus's picture

Uh... Yes power consumption grew 1Q09 to 1Q10. There was a depression in early 2009. Consumption picked up into late 2009 and so the growth of consumption to 4Q10 is going to look less. US industrial consumption looks the same way.

Power consumption is still growing. Even if it shrank by 1% yoy, this wouldn't be collapse like

chindit13's picture

China has both an inflation problem and an internal bureaucratic problem. The Central Bank governor is concerned about the inflation rate (8% and rising) and wants to allow the yuan to appreciate. He is the one behind the reserve rate hikes for the major banks. The CP is willing to tolerate inflation so long as employment stays strong. The Central Bank is more concerned about rising food prices and potential riots (there is a report written by Chinese economists that has been circulated amongst various investment banks and officials in Asia. I have read it, but could not retain a copy. Perhaps TD can obtain it).

Recently the government opened its emergency food stores in order to attempt to hold down prices. Some areas of China (Shanghai) have seen staples rise 50-100% year on year. I read one estimate that a half a billion people in China now pay 50%+ of their pay just for food. In the US, food represents about 8-10% of total household expenditures. In China, food represents a much larger percent of the typical consumer basket of goods, no matter what deceptive changes the government might wish to make. Thus food price inflation has a significantly greater impact on the Chinese (and Egyptians, Tunisians, Indians, Pakistanis, etc.) than it does the US public.

Bernanke's inflationary view is parochial and geared toward the US consumer, and even then it is understated. In Ben's World, the world can starve and governments friendly and unfriendly can tumble, just so long as the summer season in the Hamptons is robust.  Bozo.

Peterpaul's picture

I recall an article from an Asian newspaper (whether Asian Times or The People's Daily) while in China which stated an investigation into food stocks reserve in a Northeastern Province had found the bureaucrats kept the same pile in the warehouse and only "bought" the reserves on paper - an investigation revealed the stocks were years old and rotted.

This may be a localized case or a problem that has been amended, but if this is as widespread as I think it may be China will be in for a suprise when it checks the larder and tries to sell the material...

KTV Escort's picture

When I was in Shenzhen last year a front page article in the China Daily said factory owners in Guangdong Province (southern China) were having a difficult time attracting workers, so were upping wages and benefits. Maybe things have changed in the past 6 months. Electricity is definitely expensive in China compared to rent. Most of my Chinese friends would rather skimp on AC than not have cellphone service. As far as cotton prices rising, not good for the many Chinese women who have small boutiques and clothings shops (I see them everywhere, especially in Shanghai), they'll be hurting.

Joe Davola's picture

All the while they're working to increase their capacity

6 String's picture

Shorting base metals seems to be a great hedge against long Silver, perhaps using options to leverage the hedge. Anyone think of some good names to short in the base metals?

Bear's picture

Just sell copper which is now at an all time high, 4.55 as we speak ... beware

CrashisOptimistic's picture

A few FYIs: China electric power comes from coal (70%).  They are the largest coal consumer in the world, even more than the US which gets about 50% of electric power from coal.

China's coal reserves are 110 billion tons and they consume about 3 billion tons a year.  As we know from oil studies, reserves don't matter anywhere near as much as production, and China's coal production is less than its consumption.  They are a huge importer.  Regardless, they have at most about 45 years of coal left, and with Australia getting slammed and a big exporter of coal to China . . . China's power consumption may get pinched.


Rogerwilco's picture

Connect the dots:

* Fed is urging banks to increase credit card limits

* Many high-end retailers now offering big discounts

* Best Buy starts a "buy it back" promo

* Wholesalers seeing 10%-20% price increases for Asian-sourced products

* Baltic Dry cratering

To me these say demand is falling here in the U.S., and Asian suppliers are getting squeezed on margins. China needs to devalue, but they don't dare try it -- yet.