Why were analysts surprised by slowing China economy?

A pork seller takes a nap in a wet market in Shanghai on April 15, 2013. China's economic growth slowed to 7.7 percent in the first quarter, data showed, below expectations and fuelling concerns that a recent recovery is faltering on subdued overseas demand. AFP PHOTO/Peter PARKS (Photo credit should read PETER PARKS/AFP/Getty Images) PETER PARKS

(MoneyWatch) While many analysts expected China's economy to expand in the first quarter of the year, the slow-down reported Monday is just the latest of many studies showing economic problems.

The government reported gross domestic product grew 7.7 percent on a year-to-year basis in the first quarter. This was down from 7.9 percent in the fourth quarter of 2012. Analysts polled separately by both Reuters and The Wall Street Journal had expected the GDP to grow to 8 percent. In a note to investors, Capital Economics said, "[The] weak GDP data shocked consensus expectations."

It isn't clear why the news was so shocking. A raft of recent reports -- by the government and others -- have indicated that China's economy was slowing down.

So far this month the government has had to retract a report about $1 trillion worth of investments and another report, showing a 19.8 percent increase in exports from December through February, has come under heavy criticism.

Last Wednesday Zheng Yuesheng, head of the statistics department for the General Administration of Customs, said the economic-planning agency had approved more than $1 trillion of investment projects in the fourth quarter of 2012, including new roads, railroads and airports. The next day the agency released a brief statement from Mr. Zheng which said, "The information was sourced from relevant reports on the Internet, which were groundless and must be corrected."

This came a week after serious doubts were raised about the agency's report that gains in overseas shipments exceeded forecasts by at least 7.5 percentage points in December, January and February. However the agency's export numbers didn't match up with what same areas reported as importing from China. For example, over that same three month period the government said it had exported $94.9 billion worth of goods to Hong Kong. However, officials there reported only $58.7 billion in imports from the mainland.

In his comments last week, Zheng acknowledged problems with false declarations but said the difference in the two reports were caused by the use of different statistical methods.

Patrick Chovanec, chief strategist for Silvercrest Asset Management, tweeted that the low GDP numbers were "No surprise, just over-reliance on credit-fueled investment." He added, "Don't forget that China's 1Q13 net exports (part of GDP) was already inflated by [the] weird boom in dubious 'exports' to Hong Kong."

Last year China saw a huge increase in credit from the government. The government's "total social financing" grew by 23 percent in 2012; the year before it shrank by 8.5 percent.

This has caused an increase in resource production even as demand for those resources has declined. The WantChinaTimes said China's producer price index has dropped by 1.9 percent this year due to overproduction. "The country's steel industry produced 2.2 million tons of steel per day in February, which was a historic high and will ultimately drive up annual production to 800 million tons. The record production came despite most producers operating at a loss."

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    Constantine von Hoffman is a freelance writer and writing coach. His work has appeared in outlets such as Harvard Business Review, NPR, Sierra magazine, Brandweek, CIO, The Boston Herald, TheStreet.com, CSO, and Boston Magazine.

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