The New York times reported on Friday that the economic data coming out of China is, for lack of a better pun, "Made In China". The report states that local officials in China are providing false statistics to hide the depths of economic issues faced by the country.
The report goes on to highlight the following:
- Some Western economists are claiming they know that officials are intentionally engaging in wrongful reporting of economic data. Government officials, probably pressurized by their seniors, are providing data regarding economic output and corporate revenue and profits as well as tax payments that does not exist.
- Electricity demand has reduced significantly, resulting in huge oversupply of coal. A sad image shows large stockpiles of coal at a Chinese port (Qinhuangdao - lot of land here in fact is used to store coal).
- The three largest coal storage areas in China are at record levels.
What should the investors do? Should they run like chickens with their heads cut off, and close their positions in companies highly exposed to China? The list is huge, but lets name a few: US Steel (X), Cummins Inc. (CMI), Caterpillar (CAT), Yum Brands (YUM), a bunch of Chip manufacturers and semiconductor companies like the Broadcom (BRCM), Qualcom (QCOM), Applied Materials Inc. (AMAT), Intel (INTC), and the list goes on and I have not even really started yet.
As avid spectators at the end of these news chains, one should neither take this report with a grain of salt nor should one make a mountain out of a molehill.
Two main reasons why this NY Times report does not matter much are listed below:
- This is not the first time China has been accused of tampering the numbers. In fact, Wikileaks had revealed earlier that US diplomatic cables (and Reuters confirmed this in their 2010 report) have discussions about Chinese GDP numbers being manipulated.
But since 2010, how many US based MNCs with high Chinese exposure have shown growth as well as faith in the region? A lot. Is that all fraudulent reporting?
- Showing huge stockpiles of coal stored in storage ports used for hoarding coal supplies does not necessarily indicate that an economic catastrophe is brewing in the region, and again, especially in times when the entire world knows that the demand for coal has drastically reduced. We all know how the stock prices of decent coal miner companies like Peabody Energy Corp. (BTU) or Arch Coal (ACI) have vastly underperformed (or non-performed, if that's a term).
In fact, take a look at this report released on May 31 2012 by the US Energy Information Administration (EIA) - it quotes, "Estimated coal stockpiles at U.S. electric power plants in March 2012 (latest EIA data available) were about 196 million short tons, almost 18% above the level in March 2011 and above the five-year range. Coal stockpiles are up as a result of declines in coal consumption by electric power plants.".
So what does the NY Times report say for China, that we don't already know for the US?
My note to investors is that if at all you have to respond, at least do not sell your positions at a loss - it might be completely unnecessary. This report should not be a reason for a sell off.
Especially now, since the timing is very interesting. On the same day NY Times reports its news, Argus Research has released a report stating that the recent uptrend in the Aussie-Yen FX cross rate that tends to signal China's growth rate indicates that markets may see a rally similar to the one in Q1 2012 in summer end and beyond. The Aussie-Yen cross rate is used to gauge Chinese growth because when investors are bullish on China, they invest in "hard-asset currencies" like the Australian dollar, sending the Aussie-Yen FX cross rate to start trending higher. This is a known metric used to identify Risk-On rallies (see this February 2012 video explaining this metric).
So now we have a warning sign calling for Risk-Off and a waving sign asking for Risk-On. Maybe the best strategy is to watch and see. Since May, the stock prices of many companies with exposure to China have already dropped significantly. If one has initiated position after May or more recently in June, hold on it.
Hopefully this week, this market's reaction to this report about artificial Chinese GDP will be same as its reaction to Moody's downgrades of US banks: Meh.