International | Nov 15 2012
By Greg Peel
It is a truth universally acknowledged that official Chinese data are rubbery at best. As to just how rubbery, or worse still, manipulated, they are is anyone's guess, given the difficulty of foreign access to Chinese data and the lack of a reliable database for Beijing to use in the first place.
At the beginning of 2012 Beijing announced an annual GDP growth target of 7.5%. The September quarter year-on-year result was 7.4%, and foreign forecast consensus has average 2012 growth around the 7.5% mark. Hmmm…suspicious? Beijing announces its quarterly GDP two weeks after the end of the quarter, when everyone else in the developed world takes two to three months to arrive at a result, which can then often be further revised down the track. Beijing's numbers are never revised. At least one Chinese official has admitted in the past the GDP numbers are more estimate than truth.
Which opens the door for the rest of the world to assume a communist dictatorship with global superpower aspirations must have an overworked propaganda department, the responsibilities of which include fudging GDP results to suit the government's agenda. Yet Beijing's 2011 GDP growth target was 8% and the end “result” was 9.2%. Bit of a miss there. Beijing has been saying for the past few years it wants to bring growth down to a manageable, rather than bubble, level, and one has to admit that appears to have worked in 2012. Why are we so suspicious?
We are suspicious because China's GDP growth is very important for the global economy in general and for the Australian economy in particular. With Europe a basket case and the US bumbling along it is vitally important China's economy does not also come in for a “hard landing”. The successive drop in quarterly GDP results in 2012 from 2011's 9.2% had everyone worried the Chinese economy was “slowing too fast”, and when the bottom fell out of the iron ore market – temporarily, in retrospect – hearts were in throats.
It has not been an easy task for Beijing to manage its GDP balance given the government's determination to restrain the property bubble while maintaining underlying economic strength. Property is one area of the Chinese economy which has the conspiracy theorists baying. Look at all the ghost towns they show on TV! The government is building cities to house millions yet current residents number in the mere hundreds!
Look at the “roads to nowhere”! Beijing is piling money into infrastructure with no purpose!
A more sober “theory” revolves around Chinese electricity consumption statistics. In short, foreign analysts have decided there is a close correlation between Chinese electricity consumption and economic output. Since late last year, electricity consumption has apparently been falling at a greater rate than official GDP results would suggest, which in turn suggests the GDP numbers are indeed “fudged”. Electricity consumption is one of a handful of seemingly inconsistent stats analysts have drawn upon to challenge Beijing's official releases.
There is also the matter of the manufacturing and non-manufacturing PMIs (purchasing managers' indices) for China for which Beijing's official monthly release each month is countered by an independent calculation from HSBC. The two are rarely the same and often at odds.
Add it all up and there are those who believe China's growth rate is not 7.5% at all but more like 6% or even a lot lower. The world is putting its faith in a lie, and we're all going to suffer as a result. However this is not a unanimous opinion.
For starters, all data and statistics coming out of China are rubbery. It is appreciated that HSBC's PMI databases are different to Beijing's, leaning more towards smaller private enterprises than to larger state-owned enterprises. Indeed, it has been suggested Beijing's PMIs may even be more robust than HSBC's. On the matter of electricity, it has been pointed out that Beijing's official figures don't actually capture all consumption, that prior to the noughties there was very little correlation to output, and that a government efficiency drive has likely forced individual provinces into understating consumption so as to appear to be meeting efficiency targets. Which rubbery figures are rubberier?
Indeed, DBS Group analysts argue that Beijing's GDP numbers may well be rubbery, but in the other direction.
DBS appreciates that it's not hard to forecast an ever slowing Chinese economy if one to draw upon what is basically the law of diminishing returns. China “boomed” in the noughties as industrialisation and urbanisation took off in the major east coast centres, but now that the roads and railways have been built, that the locals are living in apartments, own fridges, televisions are cars and are seeing their wages rising steadily, the boom is settling back. Each dollar further spent on I&U in the major centres is providing a lesser return in the form of output. Steel production is at overcapacity, cement production is at overcapacity. It all makes perfect sense.
At least it would, if China consisted only of the major east coast cities, which it doesn't.
The DBS analysts' curiosity is piqued by the fact that Beijing's official national GDP growth rate and the growth rates of the three major regions – the eastern provinces, central provinces and western provinces – do not add up. Average growth over the six months of the June and September quarters was officially 7.5% nationally. Yet in the east it was 9.2%, in the centre it was 10.5%, and in the west it was 12.4%, officially. The weighted average of these results is 10.1% growth.
Which number is correct?
This important, DBS argues, given a slowdown in Chinese growth is welcomed outside China if it is from bubble territory of 14%, as achieved in the noughties, down to 10%, which is strong yet manageable. What is not welcomed is a “crash” to 7% from 14%, which conjures up hard landing fears. DBS is not suggesting one of 10% or 7% is clearly the right number but it can see a case for 10% being achievable.
“China's growth must slow as per capita incomes rise,” says DBS, “and the eastern coastal provinces become saturated with the trophies of development”.And if we look at the following chart, we see that since 2004 the eastern region's growth rate has slowed 9.4% from 13.5%. The central region, on the other hand, has seen its growth tick up to 11.3% from 11.0% while the western region has seen growth jump to 12.9% from 12.0%.
These figures may well be rubbery but they are consistent with observation, and not just that of DBS. Many a foreign analyst – from the financial markets or from companies with interests in a strong Chinese economy – have visited China to assess the situation first hand. They have come back noting that the Chinese growth story is now rolling out away from the overcrowded east coast, into the underdeveloped central regions, and on to the wild, wild west. Those ghost towns? Vacant now but ready for when I&U reaches them. Those roads to nowhere? One day “nowhere” will become “somewhere”.
(Contrast, oh I don't know, Sydney? Where for decades successive state governments have allowed developers to build overnight satellite suburbs to meet a burgeoning demand for cheap housing only to decide, many years later, that those suburbs really need transport, schools, hospitals and shopping centres but it's all too costly – too many houses would have to be reclaimed and knocked down to do so?)
“If China wishes to keep growth as rapid as it has been over the past twenty years,” says DBS, “it has a much better chance of doing so than most people think. But the baton will have to pass to the inland provinces which remain relatively undeveloped and where potential remains untapped”.
Technical limitations
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