Monday, August 10, 2009

Is China Cooking The Books?

Forbes Magazine is looking at the numbers coming out of China and comes to the conclusion that they don't add up.

China watchers have been dubious about the quality of Chinese economic data for some time. And a recent spate of seemingly conflicting data has fuelled that criticism.

One particular quibble involves the relationship between electricity usage and industrial value added -- another measure of output. The worry is that failings in the way official data are compiled may be generating results that are giving investors misconceptions about the health of China's economy.

During the first half of this year, industrial value-added rose a robust 7 percent, while total electricity usage fell 2.24 percent. This seemingly implies that output is growing and contracting simultaneously. The divergence has attracted attention, not least because industry is half of the economy and electricity usage is one of those bits of data that is hard to massage. Even Chinese Premier Wen Jiabao has openly said that electricity usage is the data that he trusts most.
Craig Pirrong at Seeking Alpha comments on the Chinese numbers.
First, reported Chinese growth is a chimera. Chinese government statistics appear no more reliable than Soviet figures. The disconnect between electricity generation changes and reported growth is highly suspicious, especially for a manufacturing-intensive economy noted for its energy-intensity as well. The focus on big state firms that don’t produce what people want, and the slighting of small firms that do, in the collection and reporting of statistics also raises red flags (and not of the Red Flag of Revolution! variety).

Second, Chinese growth reporting is eerily like 90s-style earnings management. There’s a target, and the numbers WILL be massaged in whatever way necessary to hit the target. Indeed, some of the tactics bring sordid episodes like Enron and WorldCom to mind.

Third, it seems that the Chinese are betting on a recovery in the West, and hence a concomitant recovery in exports, and are determined to keep up the earnings management and the credit stimulus until that happens. That is a highly risky strategy. If the desired recovery doesn’t happen before the bubbles collapse, China will face both a domestic demand and a foreign demand crunch. Moreover, even if “successful” in the sense that a recovery in exports allows the government to ease up on the stimulus, it will have contributed to a substantial misallocation of capital and created the risk of substantial inflation.
It seems to me that a number of governments around the world (especially the USA) think they can inflate their way out of the problems caused by inflated bubbles. What happens when that is no longer possible? We get the worst of all possible worlds. Low or negative growth and inflation.

For an extreme example of that look at Zimbabwe.

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