China’s Numbers Game

OB-WK912_CRT_gd_G_20130221080545.jpgBy John Richardson

YET more problems with Chinese economic statistics have emerged, casting doubt over the idea that an economic hard landing was avoided in 2012 – and that there was a strong rebound in the fourth quarter.

“Official data on China’s gross domestic product show the slowdown in growth in the last two years as moderate, and in line with government targets,” wrote The Wall Street Journal in this article.

“A 7.8% increase in output in 2012 was narrowly down from 10.4% in 2010, and above the official target of 7.5% for the year. But the real situation may be a lot less rosy than the official data suggest.

“Stephen Green, China economist at Standard Chartered, says the official numbers reflect an underestimate of inflation, resulting in an overestimate of real growth. Using an alternative measure of service sector inflation, Mr. Green calculates GDP growth at 5.5% in 2012 – putting the world’s second-largest economy in hard landing territory (see the above chart).”

And although there are other signs that the economy recovered quite strongly during Q4 (also see the above chart), the same article adds that overall retail sales and auto sales growth might have been exaggerated.

Plus, it continues: “The official data shows resurgent exports coming into 2013, with 14% year-on-year growth in December.

“But a growing discrepancy between data on China’s exports to Hong Kong and Hong Kong’s imports from China, suggest that might be an exaggeration. Louis Kuijs, China economist at RBS, says that export growth could be overstated by as much as 4 percentage points.”

Positive economic data came at the right time for China’s new leaders as they settled into office.

But the problem is that “cooked” data might have misled the chemicals industry into thinking that all would be well during 2013. One wonders whether this has led to the setting of overly aggressive sales targets this year.

Intuitively, the strong surge in exports in December didn’t seem to make sense, given all the economic problems in the West.

It was, therefore, hardly surprising that weaker exports were the main reason why the flash HSBC purchasing managers’ index for February, which was released yesterday, fell to 50.4 in February from a final reading of 52.3 in January.

“Thinking of buying the dip? In a report released yesterday, Nomura’s Zhiwei Zhang and Wendy Chen offered five reasons to reconsider,” wrote Barrons, the investment newsletter.

“Reason #1: China’s policy makers are becoming increasingly concerned about financial risks in the world’s second-largest economy {hence, last week’s decision to reduce liquidity]. They’ve asked banks to scale back the risks in so-called fund pools, which lets banks pay off some wealth management products by issuing new ones, a practice the Bank of China has called a ‘Ponzi game,’ the strategists say.

“Reason #2: More energy and utility reform. China raised the tariff on railroad shipments by 13%, the largest increase since 2003, the strategists say. That may be a sign that it’s ready to lift prices on other “administratively suppressed prices,” including electricity and other utilities-and increase inflation.

“Reason #3: The real-estate rebound could force China to [further] tighten the amount of credit in the economy-which could cause the GDP growth rate to slow.

“Reason #4: The government may not act to boost economic growth during the second half of the year. Local governments, for instance, have lowered their growth targets for 2013 by an average of 0.5 percentage point from 2012.

“Reason #5: China’s leaders might crack down on companies that pollute the environment. This is clearly a good and necessary issue to tackle, but will reduce economic growth in the short-term.”

Rebalancing was always going to have happen, with the only question being “when?

We felt that the answer would be “very soon”, as seems to be the case.

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