All Of The Good Chinese Economic Data Belie All Of The Bad Chinese Economic Data

Some have delighted in the positive economic data out of China this weekend. But we've already pointed out why this could be short-lived.

It would appear that China's credit growth and infrastructure investment helped boost industrial production. In the absence of credit growth, economic growth could weaken.

And as credit growth continues to rise, the long-term risks to China's economic and financial stability also increase.

Diana Choyleva at Lombard Street Research points out that many of the driver's behind the economy's weak performance for instance, export demand, yuan overvaluation, China's business sector, and low deposit rates:

"Feeble export demand and the yuan's overvaluation have lowered real export growth sharply. Real yuan exports grew by an average quarterly rate of just 1.5% since the economy started its cyclical "hard landing" in Q4 2011 in comparison with 5% a quarter in the strong growth phase between Q3 2009 to Q3 2011. The data so far in Q3 show real yuan exports up by 2.4%, but that is hardly a sharp improvement.

"Weak export demand and fast rising unit labour costs have cut into business profits and investment. There is no respite in sight for China's business sector as growth of both European and US consumer demand is likely to be feeble. Corporate profits, both on the industrial profit and quoted firms measure, rose in Q3. But that spells bad news for the consumer, suggesting firms have finally started to improve the bottom line by cutting costs. The data for Q3 is not yet available, but real wages fell in Q2.

"Meanwhile, real lending rates remain high at 7.6% in August (deflated by the PPI) hurting the corporate sector further. Real deposit rates on the other hand are too low at 0.4% (deflated by the CPI) underpinning households' desire to save excessively, with their savings rate rising further in 2012. Some have interpreted the increase in the flow of total social financing as suggesting faster output growth is in store. But total social financing is a measure of leverage and not indicative of the economy's overall monetary conditions. On our estimates of broad money, which include most of banks' shadow banking activities, monetary conditions have deteriorated sharply in recent months."

The key question continues to be: Will the government just alleviate the current strains on the economy or is it really pushing for structural reform?