China's economic data, never easy to track in the best of times, has become almost indecipherable in 2018. While the headline numbers on GDP growth, retail sales and debt tell reassuring stories that (unsurprisingly) match government objectives, the underlying statistics paint a very different picture. What does this tell us about the state of the economy?
Investors constantly pore over a range of numbers, looking for irregularities. From short sellers of Chinese companies listed overseas to academic economists developing creative methods to mirror GDP growth, there's no dearth of analysts and no lack of data to peruse.
A simple idea motivates much of this work: Can you match a data point or variable to another data point or variable that should logically be correlated? In other words, if real GDP growth is 10% and electricity consumption is down 10%, something is probably off. Whether comparing a company's shipments with its revenue or official inflation with product prices, it's essential to match data points.
Using those methods, underlying Chinese data in 2018 are a mess. According to the National Bureau of Statistics, the consumer price index for pork declined 9.6% in the year to date until July, but weekly wholesale market prices for pork are effectively flat. Meanwhile, a 22-province price index shows a decline of only 3.4%. As pork, the most widely consumed meat in China, anchors the CPI basket, any discrepancy can have a significant impact on inflation data.
There are other examples. Earlier this year, eagle-eyed netizens noticed that while the statistics bureau was reporting industrial profit growth of 16% so far in 2018, the numbers didn't add up. Calculating the month-to-month changes and comparing each month with a year earlier, you get a profit decline of 8.1%.
The government says the discrepancy results from different samples, excluding firms that fell below a certain size. But that's as if a teacher excluded all the students in a class who received a poor grade, then announced that the average score had increased. Given the lack of transparency, we are left to wonder about many issues that produce such inconsistent data.
Many products show disparities between the announced growth rate and the manually calculated change. Output of household refrigerators was up a modest 1.6% in January-August, by the official count. Working it out step by step produces a 19.1% decline. Nor are such discrepancies confined to consumer products. Production of machine cutting tools is officially up 5%; that turns out to be a 33.5% decline by the other method. Worryingly, official and observed output growth match most frequently for products where expansion is robust and the figures don't need massaging.
Elsewhere, data sets seem contradictory. Total social financing year-to-date is down 13.4% this year, which fits the deleveraging narrative being pushed by Beijing. However, a range of credit-intensive industries are enjoying good years: Home starts are up 20% and total sales values up 16% through August, with transactions increasing robustly. Excavator output is up 44.5%. Given the necessary credit-intensity of construction and development, these growth rates raise questions about whether credit is really falling so rapidly.
To be sure, an increase in air pollution this year does provide some assurance that real Chinese economic activity remains solid. Given accelerating power consumption as growth decelerates, this probably means China is falling back on its old growth model of investment.
These examples raise questions about how China compiles its data and how investors should respond. First, the numbers remain problematic. There may be good reasons for disparities, but the lack of transparency and a tendency to let flattering figures stand while massaging poor ones should leave analysts skeptical. If China wants to demonstrate the veracity of its data, much greater openness is essential.
Second, investors must dig below the surface. There's a wealth of conflicting data, whether for a narrative about the overall economy or a look at individual companies and their products. Especially following China's inclusion in MSCI indexes, careful study can pay off.
China has shown itself capable of rapid progress. Now let's have a reliable way of measuring the components of that achievement. ©2018 Bloomberg Opinion
Christopher Balding is a former associate professor of business and economics at the HSBC Business School in Shenzhen.