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China must get to grips with dodgy data
CHINA'S economic data, never easy to track in the best of times, have become almost indecipherable in 2018. While the headline numbers on GDP growth, retail sales and debt tell reassuring stories that (unsurprisingly) match government objectives, the underlying statistics paint a very different and conflicting picture. What does this tell us about the state of the economy?
Market watchers constantly pore over a range of numbers, looking for irregularities. From short sellers of Chinese companies listed overseas to academic economists developing creative methods to mirror GDP growth, there's no dearth of analysts and no lack of data to peruse.
A simple idea motivates much of this work: can you match a data point or variable to another data point or variable that should logically be correlated? In other words, if real GDP growth is 10 per cent and electricity consumption is down 10 per cent, something is probably off. Whether comparing a company's shipments with its revenue or official inflation with product prices, it's essential to match data points.
Using those methods, underlying Chinese data in 2018 are a mess. According to the National Bureau of Statistics, the consumer price index for pork declined 9.6 per cent in the year to date through July, but weekly wholesale market prices for pork are effectively flat. Meanwhile, a 22-province price index shows a decline of only 3.4 per cent. As pork, the most widely consumed meat in China, anchors the CPI basket, any discrepancy can have a significant pass-through impact on headline inflation data.
There are other examples. Earlier this year, Chinese netizens noticed that while the statistics bureau was reporting industrial profit growth of 16 per cent so far in 2018, the numbers didn't add up. Calculating the changes month by month and comparing each month with a year earlier, you get a profit decline of 8.1 per cent.
The government says the discrepancy results from different samples, excluding firms that fell below a certain size during the year. But that's as if a teacher excluded all the students in a class who received a poor grade, then announced that the average score had increased. Given the lack of transparency, we are left to wonder about many issues that produce such inconsistent data.
Many products show disparities between the announced growth rate and the manually calculated change. Output of household refrigerators was up a modest 1.6 per cent in January-August, by the official count. Working it out step by step produces a 19.1 per cent decline. Nor are such discrepancies confined to consumer products. Production of machine-cutting tools is officially up 5 per cent; that turns out to be a 33.5 per cent decline by the other method. Worryingly, official and observed output growth match most frequently for products where expansion is robust and the figures don't need massaging.
Elsewhere, data sets seem contradictory. Total social financing year to date is down 13.4 per cent this year, which fits the deleveraging narrative being pushed by Beijing. However, a range of credit-intensive industries are enjoying good years: home starts are up 20 per cent and total sales values up 16 per cent through August, with transactions increasing robustly. Excavator output is up 44.5 per cent and matches the unit growth. Given the necessary credit-intensity of construction and development, the growth rates of these industries raises questions about whether credit really falling so rapidly.
To be sure, an increase in air pollution this year, much easier to verify independently, does provide some assurance that real Chinese economic activity remains solid. Given accelerating power consumption as growth decelerates, this probably means China is falling back on its old growth model of investment.
These examples raise questions about how China compiles its data and how investors should respond. First, despite assurances to the contrary, the numbers remain problematic. There may be good reasons for disparities, but the lack of transparency and a tendency to let flattering figures stand while massaging poor ones should leave analysts sceptical. If China wants to demonstrate the veracity of its data, much greater openness is essential.
Second, in China more than almost any other country, investors must dig below the surface. There's a wealth of conflicting data, whether for a narrative about the overall economy or a look at individual companies and their products. Especially with the increased inflows of funds following China's inclusion in MSCI indexes, careful study can pay off.
China has shown itself capable of rapid progress almost everywhere in its economy. Now let's have a reliable way of measuring the components of that achievement. BLOOMBERG