China GDP at 7.5%? Not Likely

Tickers in this article: SHCOMP ^GSPC
NEW YORK (TheStreet) -- Stock markets around the world are seeing gains early in the week, propelled, in large part, by relatively strong GDP figures out of China. For the second quarter, Chinese growth was reported at 7.5%, stoking bullish optimism in the market and softening concerns of deceleration in world's second-largest economy.

The S&P 500 is once again pressuring its all-time highs and the Shanghai Composite Index is trading near its best levels for the month. This is the second straight quarter of slowing expansion, but the in-line print was still interpreted as a positive, given recent comments from China's leadership suggesting a willingness to accept weaker growth prospects.

But how accurate is the report? Are there reasons to believe that the data are inflated? The numbers indicate that declining trade activity and official measures to contain bank lending have taken effect, and that the country is now on a trajectory to post growth rates of below 8% for the foreseeable future.

Recent comments out of Beijing prepared markets for a negative outcome, as signs of distress are building. The government's target growth rate for 2013 is now 7.5%, which, if realized, would be the lowest expansionary rate in more than 20 years.

For potential investors, declining headline growth should be taken alongside the recent turmoil that has been seen in Chinese stock markets, which show strong bearish moves in a year of global recovery. Together, this suggests that risk in both the real goods and financial sectors is one the rise, and that investors with exposure to companies in the country should consider reducing that exposure.

Reasons for Skepticism

This week's report does not reflect the severity of China's drop-off in growth, and there is a strong possibility that these latest GDP numbers are skewed in a way that distorts the real economic picture in China. This should light warning flares for those basing their investment decisions on the validity of the country's official data. Along with the contractions in aggregate financing and exports seen in May and June, losses in manufacturing productivity were present throughout the entire second quarter. This creates a scenario where sub-5% GDP growth rates are far more likely.