International | Aug 27 2012
By Greg Peel
The Dallas Federal Reserve clearly has a stake in the state of China's economy, given oil and agricultural exports from the region in particular. The Dallas Fed economists are the latest to query China's June quarter GDP result and its seeming inconsistency with consequent electricity consumption numbers.
China's massive stimulus package implemented in late 2008 saw the Chinese GDP rebound rapidly from around 6% growth to reach the pre-GFC level in 2009 and exceed 10% by 2010, Dallas notes. India's GDP did likewise and Brazil's hit a 25-year high of 7.5%. By contrast, developed market economies are yet to recover pre-GFC growth levels. But Beijing has a history of overstepping, and the resultant property bubble forced an about-face on monetary policy. With tightening measures in place, China's year on year GDP growth fell to above 9% in 2011, 8.1% in the March quarter 2012, and 7.6% in the June quarter. June's result is the slowest since the GFC.
It is common knowledge that Beijing's economic data are dubious, relying, as they do, on provincial data collection by those with political interests. One Chinese government official has famously suggested China's data should be used “as a reference only”. Yet since the GFC economists outside China have been able to track electricity consumption data and note a strong correlation between consumption and industrial production.
Which is why the recent June quarter GDP result of 7.6% growth has been questioned by economists across the globe. The figure seems too strong when compared to the quarter's electricity consumption data. China's electricity usage is gradually becoming more efficient but the Dallas economists see too much of a divergence for increased efficiency to be the answer. In the March quarter, electricity consumption grew by 5.6% year on year which, on a correlation basis, suggests industrial production (IP) growth of 9.3%. Beijing reported 11.9%.
Of course the provincial IP numbers could also be off the mark, but it is unlikely, Dallas suggests, that they would all be off the mark to the upside. It is more likely Beijing was keen on overstating the numbers to mask general economic weakness.
There is, nevertheless, the matter of varying electricity consumption intensity among industry sectors – a factor cited by others attempting to find reasons why Beijing's numbers appear so inconsistent. A factory producing steel (heavy industry) consumes more electricity than, for example, a factory producing T-shirts (light industry), notes Dallas. For this reason it is more accurate to split the aggregate IP growth number into two and then apply an intensity factor to the separate growth numbers for heavy and light industries.
Such analysis leads the Dallas economists to decide Beijing's March quarter numbers looked okay. From December to March heavy industry IP growth fell from 13.0% to 11.2% while light industries saw an increase to 13.9% growth from 12.6%. Crunching the numbers, Dallas gives the net result a tenuous thumbs up. For the June quarter however, the situation reversed with heavy industries growing and light industries contracting sharply on Beijing's numbers. The subsequent fall in electricity consumption should thus have only been modest, but it wasn't. Indeed consumption should have grown by twice the published amount to maintain data consistency, Dallas calculates.
Other economists have argued there may be other, less insidious, issues with Beijing's data collection than outright manipulation. The heavy/light argument is one, but another is the accuracy of the electricity numbers themselves. Provincial governments have been set efficiency targets by Beijing which can be achieved by simply understating consumption. Privately run power generators have recently joined state-owned generators in providing for China's electricity needs, but they're not counted. Consumption in some of the far-flung provinces is also not counted, and a lot of China's dirty and highly electricity intense aluminium smelting industry has been banished to the boondocks.
And as the economists from ANZ Bank have noted (See: Disputing China's GDP Numbers), this is not the first time China's IP and electricity consumption numbers have diverged, and in the past they have also diverged the other way.
In other words, there could well be rubbery figures everywhere. One should thus not move to a state of panic over China's economy, even if the numbers look dodgy. Not being able to trust the numbers is nevertheless in itself a major frustration for economists and central banks across the globe given the sheer importance to the global economy of China's economy in the twenty-first century (particularly for Australia).
The good news is that Beijing is lifting its game, the Dallas Fed notes. China's National Bureau of Statistics has started a new data collection system involving direct online inputs from industry, thus bypassing provincial government interference and potential manipulation. Beijing knows that if it is to be taken seriously as an economic power, reliable data is an important point on the checklist.
We shall await with interest China's September GDP numbers, due in October.
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