Debate Continues About the Validity of China's Economic Data

First off, a lot of investors and government officials have recently been trudging to Beijing in spite of the heat and mugginess and seem to be eager to discuss the outlook for China. Perhaps because the press, and more importantly a lot of Chinese academics and think tank types, are beginning to worry much more in public about the medium term outlook, the conversations seem to be a lot more worried than they have in the past. On my upcoming trip I hope to get some more idea of what big investors are thinking, and if I am allowed to repeat their views, I will.

Next, I see that recent US GDP numbers are getting a mixed reception. Second quarter GDP contracted by an annualized 1.0%. That isn’t a good thing, of course, but it is much better than the 6.4% contraction in the first quarter, and also better than the 1.5% contraction that the market was expecting. According to an article in today’s Financial Times:

While the contraction was much smaller than in the previous three quarters and slightly better than economists had expected, the data showed that the government stimulus and a slowdown in imports had cushioned the drop.

Of course most analysts continue to be worried about, and debate, whether the US is better off slowing the stimulus, and so reducing debt while speeding up the needed adjustments at the cost of higher unemployment, or continuing pushing forward – a debate very similar to that taking place in China. Given my focus on China my main concern – no big surprise – was US consumption, which declined by more than GDP, which I expect to be a regular feature of the next few years.

Consumer spending, which represents about two-thirds of GDP and has traditionally been the engine of US growth, fell a much worse-than-expected 1.2 per cent as Americans continued to cut back in the face of rising unemployment and the falling value of their homes and investments.

In Japan, a country that I am spending more and more time learning about because of some worrying parallels between their 1980s and China’s current condition, the numbers continue to be very poor. Again the Financial Times today tells the story:

Wages in Japan suffered their sharpest drop in nearly two decades in June, fuelling concerns that the economy would remain under pressure from depressed consumer spending. Monthly wages, including overtime and bonuses dropped 7.1 per cent from a year earlier for the 13th decline in a row to Y430,620, according to the Labour Ministry. It was the steepest drop in wages since the government began compiling data in 1990.

Wages in China, on the other hand, seem to moving in a very different direction – no surprise, I think, given the extent of the stimulus package. Here is what Xinhua said on Wednesday:

Average wage per capita for Chinese urban employees grew 12.9 percent year on year to 14,638 yuan (about 2,149.78 U.S. dollars) in the first half of this year, said the National Bureau of Statistics Wednesday. The growth rate was 5.1 percentage points lower than that in the same period last year, the bureau said.

Even acknowledging all the distortions, and recognizing that this year’s growth rate in wages was much lower than last year’s (will this put pressure on consumption growth?), this still seems like a very healthy growth rate. Funnily enough however the numbers were questioned in, of all places, today’s People’s Daily. In their article they had this to say:

Banter and sarcasm erupted in the wake of a National Bureau of Statistics (NBS) report Wednesday saying the average pre-tax wage per capita for urban employees grew 12.9 percent, year-on-year, to 14,638 yuan (2,142.43 U.S. dollars) in the first half of this year.

The seemingly inspiring and encouraging news did not draw much applause, but a hail of criticism from the public, with many being skeptical of the figures’ credibility. The term: “I’ve been given a raise,” referring to the furor over the NBS’s statistics, has become increasingly popular among China’s mass of Internet users.

On the popular online forum tianya.cn, a commentary read, “The statistics released by the NBS are miraculous, as the increase managed to surpass the GDP growth of 7.9 percent registered in the second quarter against a backdrop of the global financial crisis.” However, the poster noted, most people’s pockets remain shallow.

A poll on tom.com showed as many as 88 percent of 2,816 respondents believed it is reasonable to doubt the income rise announced by the NBS.

I was impressed by the fact that the article just reported the skepticism and didn’t make much more than a very half-hearted attempt to explain why the public is wrong to be skeptical. As an aside, in recent weeks it seems to me that there has been an increasingly heated, but not always on-the-record, debate about the conflicts and contradictions implied by official Chinese growth numbers and other indirect measures of growth – with Marc Faber last week giving an especially blunt assessment. I have been hearing from a lot of Chinese and foreign colleagues about challenges to the data, and although I am not smart enough to contribute much to this debate, I expect it to become more public – already there have been several articles in the Chinese press referring obliquely to disagreements about the data and defending the quality of the NBS statistics. Perhaps the People’s Daily is now leading the charge for prosecution?

Speaking of prosecution in the Chinese press, Caijing continues to feature a series of excellent articles questioning the impact of the stimulus package. I won’t summarize them all, but I found this article in this week’s issue, by Chen Changhua, interesting:

Through bank lending and money supply, liquidity has been ample in the market. However, nominal GDP growth lagged far behind the growth in lending and money supply, which could raise suspicion that a large portion of the funding has entered asset markets.

In the next one or two years, the global economy won’t be able to recover and, due to overcapacity, consumer price index (CPI) will not be able to rise sharply. Even if the central bank wants to tighten money supply then, various aspects of society won’t support it. It’s no longer a question of whether the central bank should rein in its loose monetary policy, but whether or not it will actually do it.

China’s fiscal and monetary policies in the past few years have placed growth before anything else. It is unlikely that the Chinese government will raise interest rates when economic recovery has not yet been secured.

Chen’s basic argument is that policymakers should be encouraging private enterprises to compete with SOE’s because when the “bubble implosion” occurs (he doesn’t seem to think that the “if” is worth pondering), China will be better served by the productivity-enhancing private sector:

How quickly a country can recover from an economic slump is determined by the productivity of the country. Japan has not been able to recover from the 1990 slump mainly because there are not enough competitive new-generation enterprises to replace old enterprises.

If it is difficult to avert a new round of asset bubbles, then opening domestic markets to private enterprises is a good option. In the past few years, state-owned enterprises have become larger and stronger while playing the role of the offense while private enterprises have been on defense. Maybe it’s just a hope of mine that private enterprises will muster their forces soon as well.

One of the big worries about the stimulus, of course, is that it is forcing a further concentration of credit and economic activity into the SOEs, who are among the least productive players in the Chinese economy – even when you don’t question whether or not their profits are real or simply a function of highly subsidized interest rates.

Meanwhile the debate about the duration of the fiscal stimulus rages on. On the one hand Andy Xie, former chief Asian economist for Morgan Stanley, and someone well plugged into Chinese policymaking circles, said in an interview with Bloomberg:

“The government is worried that this bubble is becoming too big so they’re going to cut credit growth by probably half in the second half,” said Xie, now an independent economist, in a Bloomberg Television interview in Hong Kong today. “I think the property and stock markets will come under pressure probably around October time.”

China’s banking regulator said yesterday it plans to tighten rules on work capital loans, seeking to prevent misuse of funds. New loans in July may be less than 500 billion yuan, the Shanghai Securities News reported on its front page, without saying where it got its information.

It’s “undeniable” that a portion of this year’s new lending entered the nation’s stock and property markets, Cheng Siwei, former vice chairman of the standing committee of the National People’s Congress, China’s parliament, said in June.

On the other hand Vice Premier Li Keqiang (a graduate of Peking University, I am proud to say) wrote recently in Qiushi, according to an article in today’s Bloomberg:

China will maintain its “proactive” fiscal and “moderately loose” monetary policies to help the economy recover from a slump, according to Vice Premier Li Keqiang. The foundations of the recovery aren’t yet solid enough, as evidenced by the continued slide in exports, lower corporate earnings, falling prices and industry overcapacity, Li wrote in the Aug. 1 issue of Qiushi, a twice-monthly Communist Party magazine.

The outlook for the global economy is still uncertain and recovery is being hampered by rising trade and investment protectionism around the world, Li wrote. There’s been no “fundamental change” to the dollar’s dominant position in the international financial system, though the trend of diversifying away from the greenback will continue, he added.

Finally, and on a separate point, like me Nouriel Roubini has been wondering about the impact of recent Chinese commodity stockpiling. According to an article in Reuters today he gave a speech in which he discussed the impact of future commodity prices. Among other things he said:

“In the short term there has been a massive stockpiling of commodities by China,” he said. “My concern is that China might have accumulated an inventory of commodities that is probably excessive to the growth of their own economy.”

I agree. I am pretty sure that a lot of recent purchases represent many quarters and even years of future demand, and so they are distorting the trade numbers by implying the country is importing more than current demand implies. By the way for those interested in my argument as to why China should not be stockpiling commodities quite so quickly, here is today’s version of my bi-weekly column for the South China Morning Post.

Comments

[Alan Young:]

From the Chinese investor's point of view, it's too late for facts to matter.
Shanghai stock is in a bubble, even with the best interpretation of the economy, which means it goes up until it crashes. If you're in, ride the tiger.

Other markets that will benefit from strong Chinese economic activity--Australia, Korea, Indonesia-- are benefitting, too; but these countries can rely on some domestic consumption as well, so the crash won't come as hard.

The big question for US investors, then, is how the H-shares will fare. I'd be cautious. Time to go long is after the bubble bursts.

Aug 03 05:02 PM

[Sober Realist:]

Prescient words from economist Richard Wolff (Aug 2,2009):
One of two things is going on. Either the Chinese economy is genuinely entitled to be called a miracle or something is happening in China that is frightening, which is a disconnect from reality, an explosion of myhtology, of numbers that are deeply, one would have to say dubious. Let me explain. Everywhere in the world, everyone has been saying for the past 25 years that the genius of the Chinese economy was based on exports, that China could and did produce, better quality and lower priced or both, and flood the world with their exports that their economy made possible. That was what everybody said, including the Chinese. We now have a situation in the world where we have a global capitalist crisis. Everywhere consumption is down...How is it possible that in that society so dependant on the world economy, they could now have an explosive growth. Nothing remotely like it in the rest of the world. In order to believe what the Chinese are saying, you would have to agree that in a matter of months, at most a year and no more, they would have been able to transform their economy from an export-based powerhouse to a domestically focused industrial engine. No where in the world has that ever taken less than decades. And that would have to have happened in the face of growing unemployment..."
Watch the video:
therealnews.com/t/inde...

Aug 03 07:35 PM

[odin:]

There is a lot more unity in views that the market is bubbling but are quite a few unanswered questions re: who is speculating in these markets. The more interesting questions are what happens after there is a large correction in China. I dont claim to have the answers but the right questions are just as important.

If the Shanghai market unravels, will there be contagion effects in commodities and real estate in Asia (undoubtedly)? Will this contagion spread to neighboring or other emerging markets (shades of the Asian crisis)?

And what impact will this have on local population (esp. if the average Wang or Lee has been speculating in these markets and borrowing to fund his position)? Unrest in China? Military adventurism in the Pacific?

What about the impact on US retailers whose profits are largely derived from labor arbitrage (Walmart)? What impact on consumers who have gotten used to cheap goods?

Aug 03 08:42 PM

[MChen:]

The Chinese save 30 to 50% during the good time and spend on big items during the bad time to make good use of the stimulus packages. Is this too difficult to be understood by those (people and governments) who spend lavishly via debts during good times and suddenly stop spending during bad times? Which way of life do you believe is more reasonable and long lasting?

A million tons of copper bought during last March will be worth a lot more (and much more) than the (surplus) depreciating $ reserve fund used for that purchase as time goes on.

Aug 03 08:55 PM

[Michael Clark:]

American capitalists have been taken in by the Chinese. How naive they have been in assuming that the Chinese have agreed to play by the rules. Communists make their own rules. Also, nothing matters as much to Asians as 'saving face'. It is ok to lie in order to save face. It is ok to cheat in order to save face. Face is everything. Appearances are more real than reality is.

Aug 04 02:30 AM

[China Interest:]

Here is perhaps a way of looking at the current situation in China (taking a page from the 'Animal Farm'). Say we use a milking cow as an example of China. The cow was a good milk producer on ample good feed for 30 years. But the feed source from elsewhere was suddenly and sharply cut. Nevertheless, the farmer continues to push milk production just as much as before. Now as anyone on the farm knows - milking a clow at maximum ouutput while cutting the feed will ultimately exhaust and perhaps ruin a good producer. Thus, the farmer knowing this substitutes the good quality roughage coming from elsewhere with what is available at home. The farmer has a rich green alfalfa field with lots of nitrogen to pasture the cow on. Sounds great until you know that too much of a good thing can be deadly. Bloat is a common result of using an inappropriate and too rich of feed source. If bloating is left too long without doing something to remedy the problem - the only way to save the cow is to put a knife to the gut to let the inflated gas out or the cow will sucumb to death.

Does this sound familar?

Now let us extend this example and say we have not one but a herd of milking cows. They have been in production a long time with no new genetics nor young replacements added. They are all been placed on the rich alfalfa pasture even though their is a sharp reduction in roughage from elsewhere. They are being pushed for maximum production. Thus the farmer looks good on paper. He is meeting all the production goals of the farm. But on closer observation it is quite evident that many (if not a lot) of the cows are experiencing severe cases of bloat. The farmer nonetheless - rather than cut milk production and take the cattle off the pasture - proceeds without due dilegence.

Hmm ... Perhaps if the farmer cut milk production temporarily to a manageable level; infused some new blood into the herd; culled the weak and old; did proper maintenance of the herd; and put effort into planting fields with appropriate feed for the herd at home - he could have sustained fairly good milk production in the foreseeable future. Instead the farmer risked everything to achieve his immediate goals (perhaps on the assumption that the good roughage from elsewhere would be coming back soon). All efforts were diverted to maximize production and little was done to sustain production.

It appears more and more likely that this will be a last milk run for many of the cows because bloat will kill them. There is time to save some by getting them off the pasture or sticking them in the gut with a knife to let the gas out. I guess it could be said - it was a good milk run while it lasted.

Aug 04 05:02 AM