Much has been said about China saving the world from economic armageddon. Well I have news for the China bulls, the macro-economic data that you are pinning your investment hopes on are no where near as good as you think. In fact they are probably quite far off the mark.
Jun 25, 2009, Tom Holland, SCMP
There is an old joke about proud parents: they all insist their children are above average. You could equally well make it about men. Every man alive is convinced he is a better than average driver.
Both, of course, are arithmetical absurdities. But the joke is not just on parents or the male sex. It also applies to the mainland economic data.
Consider last year, when every single one of China's 31 provinces, with the sole exception of Shanxi, reported growth rates for their gross domestic product above the national average.
This phenomenon is not hard to explain. Officials are assessed according to the pace of local economic development and have a powerful incentive to exaggerate growth rates when reporting economic data to the central government.
But although they are easily enough explained, this and other quirks of mainland data gathering and reporting sow significant doubts in the minds of many observers about the credibility of economic statistics published by Beijing.
As a result, a few diehard sceptics continue to question whether the economic rebound widely believed to be gathering steam on the mainland is for real.
As evidence, they point to data like Japan's exports to China, which were released yesterday showing a 30 per cent fall over the year to May and little movement compared with April's number. If China was really growing at the 7 per cent many economists are forecasting for the second quarter, then its imports from Japan would look a lot less anaemic, argue the doubters.
Similarly, others have cast doubt on whether recent steep declines in electricity production and corporate profits are really consistent with an official inflation-adjusted growth rate of 6.1 per cent for the first quarter of this year.
These misgivings are reinforced by the way in which official figures for gross domestic product are published. The number for the first quarter came out just 16 days after the end of March. In contrast, statisticians in the United States, with a vastly more sophisticated data-gathering machine, took 29 days to produce their initial estimate.
To make things worse, Beijing only releases year-on-year figures for inflation-adjusted growth rather than quarter-on-quarter numbers. And although it does publish absolute amounts for quarterly GDP, these are not adjusted for inflation.
These and other misgivings have fostered a cottage industry of economists attempting either to deconstruct the official numbers to come up with more reliable figures, or to develop proxies for the true economic growth rate.
The results they produce are seldom pretty. Analysts at Morgan Stanley long ago warned that the official 6.8 per cent year-on-year figure for GDP growth in the fourth quarter of last year was wildly misleading. They estimated that in quarter-on-quarter terms, growth had ground to a halt - a suspicion confirmed this week by a National Bureau of Statistics official who admitted the quarterly growth rate was actually just 0.1 per cent.
Meanwhile, analysts at Lombard Street Research have derived an alternative figure for real first-quarter growth by applying a derived deflator to the published notional output.
Instead of the official 6.1 per cent growth rate, they estimated that real year-on-growth was flat in the first quarter.
And analysts at Capital Economics have calculated their own proxy for GDP growth using data for domestic freight volumes, electricity output, construction activity, passenger transport numbers and sea-port traffic.
They conclude that although the official figure for the second quarter will almost certainly be significantly higher, actual GDP growth will be no more than 6 per cent.
Far from being above average, for the mainland that would be distinctly sub-par.
The fact is economic growth in China over the past 15 years has been largely driven by the US consumer. The US has been the largest importer of Chinese "crap" as CNBC's Mark Haines puts it over the past decade. From toys with lead paint to plastic garden gnomes and laptop PC's, China has become the "factory of the US". In turn China has benefited by increased employment, higher wages and a better standard of living, all financed by the US housing bubble and credit boom. China's economic fortunes depend heavily on the fate of the US economy. Without a recovery to previous US spending levels, Chinese factories will lay idle, unemployment rise and economic growth falter. Although Chinese domestic consumption is rising, it is nowhere near enough to replace the now anaemic US conusmer. As economist Andy Xie has noted, the amount of stocks and real estate held by the population is only twice the GDP compared to developed nations where similar figures are four times GDP. Furthermore if you factor in rising unemployment and lower wages, the propensity for the typical Chinese to go out and buy that flat screen TV is now much lower.
The last thing the Communist Party wants are unhappy citizens taking to the streets and demanding a regime change. So, in addition to fudging the economic data, the Chinese government has been desperately shoring up the stock and real estate markets to give the impression things are still rosy. Question is, how long can they continue to do this before fundamentals catch up.
As Premier Wen said at the EU conference in February, "dont depend on China to save the world from economic depression". Maybe he knows something about the economic data that we don't.
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