Wednesday, August 5, 2009

China's Provincial Growth Figures Far Overstated versus National Figures

As I have repeated throughout the life of the blog - I always listen to companies* to figure out what is going on in the economy, not government reports. (*with the caveat that the bottom line is not to be trusted by companies either due to American style artistry in accounting) There is a great incentive to fudge numbers by those in positions of power, even if you believe statistically it is somehow possible for a government bureaucracy to measure economies of trillions of dollar in size in very short amounts of time. Even if you believed the government could accurately measure such large economies, we've outlined in multiple pieces the disfigurement that has gone on in the US reports over time to "adjust things to the sunnier side of life": in inflation (CPI), employment, GDP. If you lived in a government report world you'd think this country has just come off the best 10 years in its history. GDP surging! Inflation nearly non existent! Record low unemployment! And surely it is little different elsewhere - politicians are the same throughout the world.

It has been amusing watching all the rip roaring action as we celebrate every government report out of China as gospel.

[Aug 3, 2009: China Purchasing Managers Index Leads Way]

As with everything governmental let us take these figures below with large degrees of salt. While directionally I am sure the Chinese figures are correct, the exact number is anyone's guess. The premarket exuberance today appears to be related to the Chinese Purchasing Managers Index which expanded yet again...

[Jun 10, 2009: Chinese Economic Reports Supplant US Reports in Importance]

This must be at least the 10th time in the past 3 months the market has gapped up overnight based on a Chinese economic report.

Obviously as a relatively closed society you have to take what the Chinese are reporting with an extra grain of salt... in fact much like I like to review what companies are saying and reporting (at least in the top line) as opposed to the US propaganda machine, many economists prefer to look at electricity consumption figures in China as a better way to judging what exactly was going on inside that country. And what do we see there?
  • Economists have also questioned NBS reports that industrial output rose 7 percent in the first half, while power generation dropped 1.7 percent.
  • Energy experts told RFA they hadn't seen previous cases of such strong economic growth without corresponding power demand. “It would be very unusual to have rather substantial growth in GDP coupled with a substantial decline in electric power consumption,” said Robert Ebel, senior adviser to the energy and national security program at the Center for Strategic and International Studies in Washington.
You can look at the price of natural gas in the US (unlike oil, natural gas is mostly a reflection of domestic demand) to see as goes nat gas, so goes the economy. This is the only major commodity to not rally this year because frankly demand in America is simply that flaccid...i.e. the real economy still is weak. Natural gas and coal are heavily used in industrial production, hence the laws of nature I assume apply very much the same in China. But again there is no sense offering this viewpoint to a gaggle of bulls who believe everything CNBC blurts as gospel. Perception IS reality on Wall Street.

As I do with every China story let me say, the long term story is not changing and demographics is destiny... the next few decades hold much opportunity. But that doesn't mean there are not speed bumps in the short to intermediate term and we cannot dismiss a lot of the rainbows and butterflies we are being fed. There does appear to be a Chinese brand Kool Aid as well - it's not just American made! What is happening in China is quite clear - massive money supply growth, and loan growth... being funneled into all sort of asset inflation and commodity collection. They've learned from America, and "improved" on it...

Going down the path of "fun with numbers" (figures lie and liars figure?) I found a few other stories of interest I thought I'd share. First in the we see the 31 provincial-level "economic figures" don't really quite match up with what the national authorities are spitting out. You know what they say - garbage in, garbage out. It appears to me the national is taking the provincial figures, applying some arbitrary haircut because they know there is great incentive for the local officials to lie, and then we get to watch Tim Seymour on "Fast Money" crow about how "super awesome" the Chinese economic data is. And I am not picking on poor Tim who probably has a far better grasp of what is going on globally than 98% of "China is cool, buy Chinese stocks" advocates on financial entertainment TeeVee.
  • China’s gross domestic product figures are among the world’s most closely watched since they can move markets or boost hopes of an imminent recovery. But the latest set of first-half numbers provided by provincial-level authorities are far higher than the central government’s national figure, raising fresh questions about the accuracy of statistics in the world’s most populous nation.
  • GDP totalled Rmb15,376bn ($2,251bn) in the first half, according to data released individually by China’s 31 provinces and municipalities, 10 per cent higher than the official first-half GDP figure of Rmb13,986bn published by the National Bureau of Statistics.
  • All but seven of the regions reported GDP growth rates above the bureau’s first-half figure of 7.1 per cent. At the start of the year, Beijing set 8 per cent as China’s growth target for the year.
If you know how "median" works, the above statistic is quite an impressive accomplishment. Impressive as in "impossible".
  • With the rest of the world looking to China as a beacon of expansion, the discrepancy is a reminder that statistics there are often unreliable and manipulated regularly by officials for personal and political purposes.
  • Some economists say provincial officials have enormous incentives to improve their career prospects by exaggerating local economic growth.
  • The NBS itself is often wary of data provided by local governments and tends to revise down preliminary estimates using its own statistical model, according to official economists.
It has now gotten so out of hand that even state controlled media is mocking it! But not the Fast Money crew!
  • Even state-controlled media reports and editorials have in recent days raised questions over their accuracy. The Global Times, controlled by the People’s Daily, the Communist party mouthpiece, reported that the public reacted with “banter and sarcasm” to NBS figures showing average urban wages in China rose 13 per cent in the first half to $2,142.
  • It quoted an online poll showing 88 per cent of respondents doubted the official numbers.
And anyone who works in accounting or finance for a middle to large sized public company knows how hard it is to gather, compile and spit out data in 5-8 days for 1 single entity; yet somehow we believe there is any accuracy in a government spitting out data weeks (or in some cases days) after a month or quarter end? Uhh...
  • “Despite starkly limited resources and a dynamic, complex economy, the state statistical bureau again needed only 15 days to survey the economic progress of 1.3bn people,” said Derek Scissors, of the Washington-based Heritage Foundation, referring to the time it took for the bureau to produce the figures after the end of the first half this year. “At worst, results are manufactured to suit the Communist party."
  • Revisions are a farce: No growth figure has ever been revised down, and announcements of upward revisions are incomplete to the point of uselessness,” he said.
I also decided to take a look at the editorial in the China Daily; here are some snippets.
  • At a time when shamelessness is pervasive, we are often at loss as to who can be trusted. The five most trustworthy groups, according to a survey by the Research Center of the Xiaokang Magazine, are farmers, religious workers, sex workers, soldiers and students. A list like this is at the same time surprising and embarrassing. The sex business is illegal and thus underground in this country.
  • It took the pollsters aback that people like scientists and teachers were ranked way below, and government functionaries, too, scored hardly better.
  • What is more worrisome in the findings is the dramatic drop in government credibility ratings. Which happens in the context of what pollsters term as "mild improvement" in public perception of society's credit conditions.
  • More than 91 per cent of the respondents admitted that they would take government data with a pinch of salt. The same proportion was 79 per cent in 2007.
  • .... since local cadres report only to their superiors, and their appointment, promotion and removal has little, or nothing, to do with the community they are supposed to serve, it is only natural that they are preoccupied overwhelmingly with pleasing their bosses.
So when Tim and crew yelp about the great growth in China, (while fist bumping) - just remember... even the Chinese citizens say take salt... a lot of it, when you see the statistics.

As for Wall Street USA? SALT FREE! - it must be true if it drives up stocks. The Chinese will save us. They will save everyone - just look at the data coming out of the country! Boo Yah!

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