China’s numbers don’t always inspire trust:
DEEP IN the bowels of the Peace Hotel, the Old Jazz Band is one of the more obscure tourist destinations of the Shanghai Bund. Built in the art deco style of the roaring 1920s, the hotel marked the epicentre of the expat community. However, war and revolution marked the demise of the Peace Hotel.
During the 1980s, as the country began its slow reintegration with the international community, the Jazz Band was brought back to life. Most of the members of the band are in their 80s, but their style is comparable with anything heard in New Orleans, Memphis or Chicago. There is authenticity to their improvisation and blues.
It is an image that is analogous to the country’s economic data. Like most political leaders around the world, the politburo in Beijing understands the importance of strong economic numbers. They transmit sound leadership and good stewardship.
However, the reality is that economic data is always in flux, and that market economies move through the various stages of the business cycle. The way you reconcile these two economic and political realities is through a great deal of improvisation.
The real issue at hand is with China’s GDP data. This is a survey of all final goods and services that are produced within a defined time period. Given that it is the product of each good or service and its price, the calculation produces a monetary value.
At current prices, the value is known as nominal GDP. The change in the total value over a certain time period, usually year-on-year, is nominal GDP growth. However, the change not only reflects the variation in output, it also records the change in prices — in other words, inflation.
Tinkering with data
Therefore, economists use the prices of a reference year to get a more accurate picture of the change in output. This removes the whole issue of inflation, and shows only the change in production or activity. This is known as the deflator. By tinkering with the deflator, statisticians can manipulate the real GDP number. This is what most economists believe is happening in China, and it is the reason the government never misses its intended real GDP target by more than 0.1 per cent — something that rarely happens in the rest of the world.
This creates a great deal of blues throughout the economics profession, because China is the second-largest economy in the world, and it has an enormous impact on a wide range of sectors. Therefore, having a good idea on where the country is in its business cycle is important in making investment, production and allocation decisions.
Of course, there are ways to combat the blues, mainly through a bit of creativity and improvisaprovides tion. The private sector a wide array of data that provide glimps es into domestic demand. For example, economists use electricity consumption, car sales, iron ore imports and box-office receipts to estimate the level of demand.
The Purchasing Managers Index, PMI, is also a good bellwether of economic data. For most of 2018, China’s PMI steadily lost ground, dropping below 50 early this year. A level below 50 reflects a contraction in economic activity. However, the index jumped above 50 in March, suggesting that the Chinese economy was on the mend. Car sales showed a similar trend. Sales slowed during the latter half of 2018, but dropped 18 per cent y/y in January. In March, they were off by seven per cent y/y. This suggests that the worst is past, but the sector remains weak
The slowdown in 2018 was mostly due to the deleveraging that Beijing mandated, particularly in the shadow-banking system. The slowdown was exacerbated by the trade war with the United States. However, the recent improvement was due
to a fiscal stimulus that was introduced at the start of the year.
Through the use of other economic data points, it is possible to establish a better understanding of the Chinese economy. Of course, it would be better if Beijing did not fudge the official numbers and provided a more transparent picture of what was going on. Statistics on trade, iron ore imports, car sales and PMIs provide glimpses on narrow sectors that allow economists to guess how the Chinese economy is doing, but it is far from complete.
A credible publication of the national income accounts would provide a great deal of insight into the trends, opportunities and challenges facing the Chinese economy.
It would allow exporters to plan and invest accordingly, and it would allow a more efficient allocation of resources around the world. Nevertheless, given the recent micro trends in the data, the China blues seem to be fading away.