Treasure Chest | Jul 22 2013
By Greg Peel
It is a truth universally acknowledged that official Chinese data out of Beijing has to be taken with a grain of salt. Even the government admits most data are more estimate than reality, and there has long been a suspicion Beijing starts with a number it wants to publish and then works backwards. It is interesting that following the release of Beijing’s June manufacturing PMI, the government announced it would suspend monthly PMI publication for the time being given it was becoming “too difficult” to collect the extensive data. Yet the more complex June quarter GDP measure came out as usual two weeks after the quarter-close.
That 7.5% year on year reading matches Beijing’s target 2013 growth level set at the beginning of the year, but as the quarter on quarter trend is negative, and the government’s reform push suggests further slowing is ahead, China is likely to fall short by year-end. Economists are now suggesting 7.5% is an at-best forecast, with a lower number more likely, and the 2014 number is likely to be lower again unless the government decides to reintroduce stimulus measures.
Given the rubbery-ness of the official data, economists like to turn to other, more definitive data to get a better handle on the state of the Chinese economy and to see whether “real” data stack up against Beijing’s hurried releases. One of those data series is HSBC’s independent calculation of manufacturing and non-manufacturing PMIs, which are weighted more towards smaller Chinese businesses and away from the large state-owned enterprises. Not everyone believes HSBC’s data are unquestionably accurate, but with Beijing now suspending its own PMI publication these independent calculations will take on more responsibility.
Other Chinese data economists like to look at include electricity consumption, cement production and freight volumes. Electricity consumption is correlated to Chinese output, particularly for heavy industry, while cement production provides a real world gauge of construction. Freight volumes can either confirm or contradict Beijing’s official trade data, which often do not line up on export numbers with the corresponding import numbers of customer countries.
Standard Bank has noted that electricity consumption and cement production numbers out of China have recently stabilised, if not improved slightly on a year on year basis, however not by enough to affect an improvement in global commodity prices. Freight volumes, on the other hand, are showing significant falls both year to date and year on year. A 2.6% fall in freight volumes year on year in May has taken actual volumes almost back to numbers last seen in 2011, despite China’s economy supposedly growing at 7.5%, Standard Bank notes.
This decline is consistent with the recent PMI numbers, the analysts point out. Sub-indices within the PMI show numbers either below 50 (contraction) or only slightly above 50 (minimal expansion) for raw materials, export orders and new orders. Weak orders imply freight volumes should also be weak.
Lower volumes are a weight on commodity prices given they provide an indication of real Chinese demand. Chinese rail freight volumes explain sizeable variations among current commodity price trends, Standard suggests, for example between copper, iron ore and platinum. Standard has also found that commodity prices are still being affected by freight volume trends after a month or two, hence the data from June are just as relevant as we enter August.
A pick-up in the Chinese economy will not be on the cards unless the falling trend in freight volumes is arrested.
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