China: The Politics Behind The “Recovery”

HSBCP2.pngBy John Richardson

THE overall HSBC flash purchasing managers’ index for January, which was released yesterday, was at a two-year high (see the above chart), with the sub-index of production at a 22-month high.

This is great news for equity values and commodity prices, including petrochemicals. We might well see a rally in petrochemicals prices at the end of this week as more traders take a punt.

But this very thought provoking article from Business Insider, by Dr John Lee, associate professor at the Centre for International Security Studies at Sydney University, underlines once again that official government data is politics in China.

Could it be that manufacturers are ramping-up production on the basis of flawed official data?

Dr Lee argues that GDP growth numbers are collected in such a hurry in China that accuracy is all but impossible, and that the data from each province is then centralised and “revised” by politicians.

“County-level officials have massive career and personal incentives to tell Beijing what it wants to hear as regards hitting central targets – whether this be higher growth, an ‘engineered’ slowdown, or the drivers of growth such as fixed investment or consumption. It is the basis for their praise and promotion,” he writes.

“While the upside for dishonesty is obvious, there is usually little downside, as it’s unlikely they will be caught, let alone punished, for fudging figures.

“Bear in mind that Beijing also has strong political incentives for wanting to spread some optimism around at the moment. The new leadership under incoming President Xi Jinping and incoming Premier Li Keqiang will not be formally confirmed until March. The interregnum period until then is not the time to release bad news.

“The point is that we cannot know whether China really arrested seven consecutive quarters of declining growth, just as we cannot know whether the figures for the last seven quarters really were. No one has done any substantive and independent investigation of it.”

He also argues that the “recovery” has been driven by increased fixed-asset investment, which makes the task of economic rebalancing even harder.

But what about all the evidence of stronger retail sales, including a recovery in auto sales?

“We are told that car sales improved on the September 2012 quarter and grew 6.9% in the December quarter,” continues Lee.

“The problem is that a significant part of the sub-data used by the National Bureau of Statistics considers an item to be purchased (consumed) when it enters the showroom, not when it is driven away by a customer.

“China’s dealerships had 2.2 million unsold cars in their showrooms in June 2012, rising from 900,000 in December 2011. The figure of unsold cars in showrooms could now be as high as 2.5 million.

“Yet, manufacturing capacity is rising, suggesting that car manufacturers are jumping into the Chinese market with their eyes closed.

“According to KPMG’s Global Automotive Executive Survey 2012, China had an estimated 6 million units of unused manufacturing capacity, more than twice the size of the entire car market in Germany. This figure is expected to rise to 9 million units of unused manufacturing capacity by 2016.

“Some of these unsold cars are counted as having been consumed. The same problem applies to many other retail items. Although we cannot know the true figure, it is highly unlikely that domestic consumption exceeded fixed-investment [as has been claimed] as the major driver of GDP growth in the December quarter.”

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