White House's Kudlow says China looks 'terrible.' Numbers paint a murkier picture

  • White House economic advisor Larry Kudlow says China's economy looks "terrible."
  • However, data show the country is not in as dire straits as Kudlow's remarks suggest.
  • China's economy is still one of the fastest growing in the world.

White House economic advisor Larry Kudlow says China's economy looks "terrible," and that investment there is "collapsing." But the data show a more complicated picture.

"I'm not a China expert, although I'm boning up as fast as I can, I would just say right now their economy looks terrible," Kudlow said Thursday in response to President Donald Trump's question at a Cabinet meeting about China's prospects.

Kudlow also said the latest data showed that "retail sales, business investment is collapsing." "There may be some manipulation" in the currency and "investors are moving out of China because they don't like the economy," he added.

Growth is slowing, and the latest economic reports did disappoint analyst expectations. Worries about high debt levels persist. The Chinese yuan has fallen to its lowest level in more than a year against the U.S. dollar.

The Chinese stock market also paints a depressing picture for investors. The Shanghai exchange, which is known to be more volatile and less efficient than U.S. markets, is down 25 percent from a high it hit in late January.

Other numbers paint a less dire picture than Kudlow's comments suggest.

First, fixed asset investment did slow to 5.5 percent year-on-year growth in July, the lowest since 1999, according to Shanghai-based data company Wind Info. Retail sales growth of 8.8 percent in July from a year earlier missed expectations of 9.1 percent and fell from 9 percent in June, according to Reuters. But that is still better than the 6.4 percent year-on-year increase in U.S. retail sales reported for July.

Beijing is trying to transition China's economy to a consumption-driven one from one reliant on manufacturing. The economic growth rate is bound to decline in this process, since the labor productivity of the services industry is significantly lower than that of the manufacturing industry, according to Lu Zhang, a Beijing-based economist at investment research firm CEBM. The quality of China's growth is also improving, she noted.

Overall, China's gross domestic product is expected to grow 6.6 percent this year, slower than last year's 6.9 percent rate but still one of the fastest-growing economies in the world and far above the 3.9 percent global growth forecast, according to a July report from the International Monetary Fund. That compares with the IMF's outlook for a 2.9 percent increase in U.S. GDP this year, up from 2.3 percent last year.

Second, the Chinese yuan has fallen more than 5.5 percent in 2018 against the U.S. dollar. However, it is down less than 1 percent versus the euro over that period.

Part of the weakness in the yuan is due to a slowing economy and easing domestic monetary policy. But at the same time, the U.S. dollar index has strengthened to its highest in more than a year amid Federal Reserve tightening.

The official China Foreign Exchange Trade System RMB index, which tracks the yuan's moves against a weighted basket of currencies such as the euro, Japanese yen and Swiss franc, is down about 2 percent this year, according to Wind.

Data show foreign investment in China is on the rise, though slower than it had been. And if their currency and stock markets continue to fall, more capital could exit the country.

Meanwhile, foreign direct investment in the U.S. rose in the first quarter of 2018 to $58 billion, a 28 percent gain from the fourth quarter, according to the Organization for International Investment. It had slowed in the full-year 2017 from records the previous two years.

However, Chinese acquisitions and investments in the U.S. dropped 92 percent to $1.8 billion in the first five months of this year, research and consulting firm Rhodium Group said.

Actually utilized foreign capital in China is lower overall at $76.1 billion this year but up single digits year on year, according to analysis of Ministry of Commerce data using Wind Info.

In an indication that capital is not fleeing the country quite yet, Chinese foreign exchange reserves rose $5.82 billion in July to $3.118 trillion, contrary to expectations for a decline of $12.1 billion, according to Reuters.

China does, however, face pressure as authorities try to reduce reliance on debt-driven growth, while the economy could also be affected if trade tensions with the U.S. escalate. Kudlow's remarks come as the U.S. and China agreed to resume negotiations on trade later this month.

— CNBC's Everett Rosenfeld contributed to this report

[Correction: A previous version of this story stated that foreign direct investment into the U.S. is down. New version adds first quarter data to show that it increased.]