Photo by China Photos/Getty Images

The true state of China’s economic rebalancing, and indeed it’s overall economic growth rate, continues to be a hot topic of debate across markets.

According to the Chinese government, the economy grew by 6.9% in the 12 months to September with strength in services – led primarily by the financial sector – helping to offset ongoing weakness in the nation’s industrial and construction sectors.

The optimists point to official retail sales figures, growing at the fastest annual pace this year in October, along with recent strength in services PMI readings, as evidence that the economic transition away from industrial, trade and investment led growth to that powered by consumption and services.

On the other side of the ledger, pessimists point to persistent weakness in indicators such as electricity production, imports and exports, industrial production and construction as evidence that the economy is growing far slower than what the government figures currently suggest.

It’s certainly confusing. On one level the economy looks to be growing strongly, following the pattern of other major economies that transitioned from being developing to developed, while at the same time other sectors of the economy point to the increased likelihood of a hard economic landing.

Are the optimists or pessimists correct, or does the answer lie somewhere in between?

Patrick Artus, global chief economist at Natixis Global Asset Management, decided to investigate the anomaly further in an attempt to determine whether or not the economy is really growing as quickly as the government says it is.

Using former reliable growth indicators for China’s economy such as imports, consumption of electricity and investment, Artus notes that there has been a significant decoupling since mid-2014 between the government’s official growth reading and these indicators. Chinese imports have fallen sharply, electricity production has stagnated and investment has slowed down markedly.

“Those who believe Chinese growth has remained vigorous despite this decoupling claim that since China is becoming a service economy, this decoupling is normal,” suggests Artus in a research note released late last week.

“In a service economy, growth no longer drives imports, electricity production or investment.”

To test the validity of this argument, Artus investigated the link between GDP growth with imports, consumption of electricity and investment in other OECD economies that are service economies such as the US, UK, eurozone and Japan.

While he found no discernable link between electricity production and GDP growth, Artus notes that there was no such decoupling evident for annual import growth nor investment in other services-dominated OECD nations.

Here’s what he discovered when comparing import growth:

When we compare China to the US, UK, eurozone and Japan for the recent period, we see a major difference: in OECD countries, imports have continued to grow despite the modest growth level.

And for investment growth.

We see that in OECD countries, growth in investment has remained stronger than that in GDP and that it has closely followed GDP growth.

While there are considerable differences between China’s economy compared to other major OECD nations – the stage of economic development just for starters – the evidence uncovered by Artus suggests, in his opinion, that the government is overstating the true growth level of the economy.

“This absence, in most cases, of a decoupling between growth indicators and GDP growth in OECD countries, which are service economies, lends credence to our idea that this decoupling in China cannot be explained by the shift to a service economy, but by the fact that true growth is lower than official, published growth,” wrote Artus.

The view expressed by Artus is similar to that of MFS Investment Management who, in a research note released in September, suggested that economic growth in China is not as robust as the official government figures would have you believe.

“China may not be as dominated by services, but we believe this sector is growing much faster as a share of the economy than it was five to ten years ago. And its contribution to growth is generally much harder to measure,” they wrote.

“As long as China’s GDP accounting continues to focus on the production of countable goods while underestimating uncountable services, GDP measures are likely to be confusing.”

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