International | Jan 27 2009
By Greg Peel
It is a well understood fact that China’s economic boom ran well ahead of much needed reforms to its financial sector and that its communist-era financial systems have proven an impediment to its economic growth. Not in terms of GDP growth per se, as past numbers clearly demonstrate, but the careful management of China’s “economic miracle” – management that would go some way to preventing violent boom-bust cycles.
Loosely included within the broad brush of “financial sector” is the gathering, interpretation and dissemination of Chinese economic data. We in The West are accustomed to an almost daily stream of data, which in Australia’s case includes figures from the Reserve Bank, the Australian Bureau of Statistics and various private but well respected sources. We know the scheduling of data releases at least a month ahead, if not a year ahead, right down to a specific time on a specific day. While economists will often debate the value of certain volatile statistical releases (and subsequently warn against overreaction) they are all we have to paint a picture of ongoing economic conditions, and are at least trustworthy in their provenance.
It is not quite the same in China. For starters, Chinese economic data are usually scheduled to be released some time in a particular week and may still be delayed. Foreign economists just have to wait for sudden announcements. And as those foreign economists have little access to the raw data, they are forced to take Chinese data on face value. Outside estimates and forecasts are still calculated but they often come with a caveat that there is a large margin for error. Chinese numbers are also often “lumpy” in their quarter-on quarter influence and we won’t go into any speculation as to whether results might sometimes be “tweaked” to obtain more impressive results.
(It is also well understood that US Administrations have often in the past given their relative departments desired targets for economic data for which must be worked back from in order to engineer the right result.)
Nevertheless, with all of that as a backdrop let us consider last week’s release that noted China’s GDP grew only 6.8% year-on-year in the December quarter. This came as a shock to many, although it must be said “many” have also been in denial since about August 2007. Even once the “China is decoupled from the US argument” had bitten the dust late last year, consensus expectations were that Chinese GDP growth may slip below 9%, perhaps, or even into the sevens on a worst case scenario. But 7+% GDP growth? That’s still pretty damned impressive isn’t it?
There were two problems with these forecasts. Firstly, they were clearly wrong because the result was a very low 6.8%. The second is that one cannot use the old “two consecutive quarters of negative growth means recession” chestnut when it comes to China’s economy. It’s a spurious definition in any economy anyway (Nathan Rees take note) given it is very much a rear-view window approach. Recession is a state of mind existing in the present. But without being esoteric, it is accepted that China requires at least 8% of annual GDP growth in order to provide enough jobs growth for its burgeoning population. On that basis, anything below 8% effectively puts China into “recession”.
(In the case of the global economy, economists largely use 2% as the break even level.)
Another limitation in taking the 6.8% number on face value, note the economists at Standard Chartered, is that as a year-on-year figure it only tells us how the economy performed in the December quarter compared to last December quarter and not how it compared to the preceding September quarter. As China’s economy grew the first three quarters of 2008, it is hard to assess just how bad the drop in December really is. Indeed, was there actually a drop in December as everyone has automatically assumed?
Standard Chartered’s economists have crunched the numbers, and in order to arrive at a realistic assessment have deflated the figures for price changes in the period and then seasonally adjusted. Their result is a measure of positive 1% GDP growth from the September quarter to the December quarter.
That number is down from their quarter-to-quarter average in the first half of 2008 of 2.3% growth and 2007’s quarterly average of 3%. However, as it is still positive the figure allays fears of a big drop into negative growth in December and – if you use the chestnut recession definition – indicates recession is not at China’s door.
So now we can all get some sleep.
Or maybe not. Despite making things look a bit rosier than first thought, the economists do concede the numbers involve some “big challenges” in their calculation. For starters, China’s quarterly growth numbers are “very, very volatile” and a lot of each year’s growth traditionally “appears” in the fourth quarter.
“It is as though,” says Standard Chartered, “the statisticians throw all the data they failed to collect during the year into the Q4 number”.
The result is that Q4 (the December quarter) usually represents at least 30% of the whole year’s GDP (it was 33% in 2008). What’s more, although China’s National Bureau of Statistics last week came forward with freshly calculated annual GDP numbers for 2006 and 2007, it did not provide any quarterly breakdown. Was the change to the 2007 number made before or after it was used as the base to arrive at the 6.8% figure? We just don’t know.
Hence Standard Chartered is implying, as I suggested earlier, that there’s a bit of flying blind when it comes to outside analysis of Chinese economic data. The economists even go as far as to suggest certain irregularities imply there might be “some funny business going on”. Either way, while spurious, the data do indicate this to be “a by far more serious slowdown than any in memory”. Yet other constituent numbers, such as fixed investment, retail sales and industrial production continued to grow in Q4, the economists note.
“It is, in short, difficult to say with any degree of confidence just how slowly China is now growing”.
So what can we in Australia take from this, given our dependence on Chinese GDP growth? It was Benjamin Disraeli who first said “there are lies, damned lies and statistics.” It is better to quote Disraeli than Chicken Little, but from an Australian economic standpoint we must be cautiously realistic about 2009.