New doubts cast on Chinese economic data

“I’m not calling them a liar or anything, but….”

It’s always a good idea to be very careful about calling some person, company or institution a liar. We can speculate on whether the character concerned is one that can be trusted, but when it comes to investing all that matters is whether the information, itself, can be trusted.

A Sober Look blog highlighted a fascinating Bloomberg TV interview with Patrick Chovanec, a business professor at Tsinghua University’s School of Economics and Management in Beijing. The interview was short, but long enough for Chovanec to cast serious doubt — based on his own observations of conditions in Beijing — on the inflation and GDP numbers that China publishes as the official record. As you might guess, if we are to believe Chovanec, the latest official Chinese number for inflation (3.6%) is too low and the GDP growth number (8.1%) is too high.

As Chovanec tried pointing out (to an interviewer who apparently does not care much for ambiguity) his observations do not mean that China is lying about economic conditions. Taking the inflation question, for example, Chovanec subsequently writes

CPI is calculated based on a basket of goods, the exact composition of which is not disclosed by Chinese authorities, although some analysts have done a decent job of trying to re-engineer it.  I’m sure you could come up with a basket that shows consumer inflation at 3.6%.  Whether that reflects what consumers are actually feeling, though, is another matter.  The picture is complicated by the fact that the government knows what is in the basket and can target those items for price controls and other forms of intervention.  That keeps the prices for the select items — and the index — down, for a while at least.  But it doesn’t solve price pressures, it only distorts their impact on the economy.

So China may not be lying, in the traditional sense, but whatever they are doing the more interesting (and actionable) bit of wisdom is that their figures may just be plain wrong, distorted and, in any case, unreliable. Most importantly, how does one adjust their view of China and its prospects in light of this? (Or not.)

This whole saga brings to mind two other recent cases where market-moving economic data was actually confirmed to be unreliable:

1. Last December the National Association of Realtors announced that it had overstated home sales figures in the U.S., since 2007.
2. If you had to point to a start date for the crisis that engulfs Greece and which has since spread to the entire eurozone, then you’d likely choose November 2009. That’s when a new government announced that the budget deficit would be 12.7%, instead of the 3.7% claimed by the old administration.

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Tags: China, macroeconomics

Category: China