Did Plunging Chinese Spending Cause the Summer Slump in Electronics Demand?

The official Chinese economic statistics show only a mild spending slowdown recently, but are they accurate? Should you use them for demand planning?

China is the major uncertainty in forecasting for the semiconductor market. Chinese aggregate economic statistics are political statements, not factual measurements of market activity. China has not yet mastered making reasonably accurate estimates of economic activity or reporting results objectively without passing them through a political filter.

The sorry state of Chinese statistics has no impact on accurately measuring China's electronics export market, including the fabs built to serve demand outside China. Many of these export-oriented factories have to produce accurate reports for their foreign investors. Imported supplies and exported products are measured both by China and the source or destination country.

The uncertainty is about China's domestic demand for semiconductors — parts used to assemble the telecom, automotive, computer and other electronic products sold in China. At the 8-9% Chinese GDP growth rate reported for recent years, China would account for ~25% of world GDP growth. A significant reduction in domestic Chinese spending would have a major negative impact on worldwide economic growth and, hence, on semiconductor demand.

Source: Chinese Government Statistics, Reed Research Group

While there is always some uncertainty about the outlook for every product and geographical market, the uncertainty about China is more serious. For example, China reported on July 15 that Q2 GDP grew 9.6% from the previous year, a small decline from the 9.8% growth the previous quarter. This report is not accepted as accurate, or even reasonably close, by many of the large number of economists that spend all their time trying to divine what is really happening in China. Some believe that growth was as high as a 12% seasonally adjusted annual rate; others believe that it was as low as 2-3%. And all are skeptical that China can make a reasonably accurate estimate two weeks after the quarter is over, when countries with better economic data collection systems need 2-3× as long. Several times in the 1990s, China reported quarterly GDP growth even before the quarter was over.

The consensus on actual Chinese economic activity is that the GDP growth rate soared to ~11% in Q1 of 2004, fell to 2.5% in Q2 with the government pressure to cut spending, and will rebound to 6-7% in the second half of the year and into next year. Factory production was unchanged from May through July after rising at more than a 15% pace for many months.

If this is what really happened in China, the summer slump in economic activity — and semiconductor demand — worldwide was longer and deeper than first thought, but should be over now.