How To (Mis)Interpret Chinese Economic Data

Includes: FXI
by: Christopher Balding

A common refrain of China bulls relies on GDP, inflation, credit, and other data to support there case. One of the hardest things for even seasoned China watchers to grasp is just how fictional Chinese data is. Unlike the United States where economic data is widely believed and considered credible by most except Jack Welch, Chinese economic and financial data is created for external consumption and internal political advancement. It should not be relied upon for statistical purposes.

It is a regular parlor game among some China watchers to point out the number of errors in Chinese data. No less than the US Federal Reserve was the latest to point out that official Chinese data may not be what it claims to be. People have written entire books dedicated to deciphering the absolute mess that is official Chinese data. Last year, Tsinghua University professor Patrick Chovanec "created a problem when he said during a Bloomberg interview that "I was finding it harder and harder to reconcile China's official CPI, GDP, and PMI numbers with what I was seeing and hearing on the ground." What is more unbelievable is that these blatantly manipulated figures are so widely believed.

Let me give you two obvious examples from recent statistical releases. China declared an official GDP growth rate of 7.8% for 2012. Interestingly however, only two provinces out of 30 comprising 3.2% of Chinese population reported GDP growth rates less than official national number of less than 7.8%. If GDP was reported based upon an unweighted average or a population weighted average of provincial GDP, 2012 Chinese GDP would be 11.1% or 10.8% respectively.

To put the size of the difference between reported provincial and national GDP in some perspective, it totals nearly $1 trillion USD or 10% of Chinese GDP. Do not however, make the mistake of believing that the 10.8% number is any more real than the 7.8% number as they both come from the Party's imagination. The Chinese National Bureau of Statistics (CNBS) conjuring the data could not make its own numbers add.

Disturbingly and surprisingly, most people don't realize or for some reason even care they are using such obviously worthless data. Let's consider the issue of prices. The Chinese CPI data is just as fabricated as the GDP data. Let's take one component that is easier to track over time: the cost of housing.

Let's look at the reported price changes in private housing according to the CNBS. According to official Chinese data, the consumer price of private housing rose a cumulative 8.1% between 2000 and 2011. That is not 8.1% annually. That is total. Putting this in real terms, according to the Chinese government, the real consumer price of private housing fell 17%, if we use using official inflation for what it is worth.

Before I present actual market data, as anyone who knows anything about China knows this number is non-sensical. From my own anecdotal survey of Chinese friends, colleagues, and students who know official Chinese data is inaccurate they generally "estimate low" and guess between 50-100%.

A 2010 National Bureau of Economic Research Paper published in cooperation with the Institute of Real Estate Studies at Tsinghua University in Beijing found that between the first quarter of 2000 and the first quarter of 2010, a real estate price index of constant quality apartments in 35 major cities nearly tripled. Similar private housing price indexes in China reflect this general trend with varying numbers though all producing large magnitude increases.

While it should be noted that the private housing CPI component will not be perfectly correlated with a real estate price index, they are by no means neutral or negative. Real estate market price index increase of nearly 300% vs. a Chinese government CPI private housing component nominal increase of 8% simply cannot be reconciled.

Probably more important for investors than the errors or the size of the error is the systematic bias of the errors. Taking the two examples presented here, provincial GDP is systematically biased upwards while the CPI errors are systematically biased downwards. This is absolutely no accident. Provincial Party leaders advance by inflating GDP numbers. However, at the national level, China has an interest in moderating its official GDP while they stay in power by keeping inflation low. It is important to remember what the systematic bias of Communist Party officials is for each economic or financial statistic.

I should emphasize that I am not claiming that China has not grown substantially for instance, but I am stating unequivocally that Chinese data should be considered a propaganda tool of the Chinese Communist Party. The reality of GDP and prices is vastly different from the official data. Statistical propaganda is pervasive and extends to all manner of Chinese data.

Here is hoping that more people outside of China realize that the statistics bureau is just another propaganda tool of the Communist Party.

Memo to Xi Jinping: Tell your statisticians to at least try to make it a little harder to point out the obvious fraud in Chinese data. This is just embarrassing for you.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.