Markets turn on dodgy Chinese GDP

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 Courtesy of Zero Hedge comes a slew of commentary on why Chinese GDP is suddenly looking decidedly dodgy:

The slew of economic data out of China this week had economists chuckling into their GDP spreadsheets. No-one I meet really believes the economy is growing anywhere near the 7% the Chinese Statistics Bureau insists is the correct number. But that doesn’t really matter. What matters is that the Chinese policy makers are throwing the proverbial kitchen sink at a spluttering economy and a faltering stock market (the latter having been stoked up to help the former). So far investors have failed to appreciate the futility of their efforts as centrally planned economies and markets will surely fail sooner rather than later.

When I read a quote in the FT from one economist that “The government could not have hoped for a more perfect set of data”, I did actually laugh out loud. But National Bureau of Statistics (NBS) spokesman Sheng Laiyun, in a robust statement on Wednesday, said that “China does not underestimate its GDP deflator and we don’t overestimate our GDP”. This is in response to some interesting articles that suggest that China’s GDP deflator has been underestimated for various technical reasons, and by underestimating GDP inflation the Chinese NBS is ‘inadvertently’ overstating real GDP growth (H/T to Zero Hedge). Certainly, the sharp Q1 dive in GDP inflation into outright deflation was significant as far as we are concerned for it helped explain the authorities’ shift to a much more aggressive easing mode. In Q2, GDP inflation popped back up to rise by 0.1% yoy instead of the 1.1% decline in Q1 (see chart below). Although higher, that is still not a ‘good’ outturn.


And more from Bloomberg:

One reason being touted to explain the gap is that China miscalculates the so-called GDP deflator, a broad measure of prices in the economy.

Capital Economics Ltd. argues that China’s GDP deflator is underestimated in periods when import prices are falling less than producer prices, hence the boost to real GDP.

“It’s an esoteric point, but one with big implications: if the deflator is understated and nominal GDP growth is not, real GDP growth will be reported as higher than it really is,”Mark Williams, Chief Asia economist at Capital Economics in London, who formerly advised the U.K. Treasury on China, said in a note.

In other words, China isn’t netting out the changes in import prices when measuring overall price changes in the economy.

Skepticism over Chinese economic data isn’t new and economists frequently question whether quarterly GDP accurately captures what’s happening on the ground.

For their part, officials from China’s National Bureau of Statistics defend their numbers and differ with the analysis by Capital Economics.

Still, Capital Economics is standing by its analysis. The firm agrees that China’s economy may have stabilized or even accelerated after a sluggish period, only at a much slower pace.

It reckons that in the second quarter deflators for primary sectors like agriculture and services rose while the deflator for secondary industry tracked producer price inflation. And unlike the first quarter, import prices didn’t register big moves.

“We still believe there’s a problem,” Williams said in the note. “Accordingly, as in Q1, we think that real GDP is being overestimated by one-to-two percentage points.”

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That is my view as well. And finally, some short commentary from Citi:

The growth rate is again over-stated, in our view

The GDP deflator rebounded from -1.1%yoy in 1Q to 0.1%yoy in 2Q, while headline inflation was largely stable, but its gap with our estimates dropped from 1.4ppts to 0.4ppt. The growth divergence between the service and manufacturing sectors, however, has been the key surprise to our growth forecast. Power production growth was barely positive at 0.5%yoy in 2Q, and industrial profit growth was down by 0.8%yoy in Jan-May. By printing out another 7% growth, it again shows that the Chinese authorities can tolerate little volatility, not only on GDP growth, but also on FX, rate, property and equity markets, which could come at a cost of enlarged volatility in the future.

The CCP is having none of it, from The Global Times:

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Working out the statistics for the Chinese economy is immensely challenging and it is hard to be absolutely accurate. No wonder the West has questions about the methodology. But different methods will not affect the authority of the NBS figures.

It is alluring to have economic statistics made on the government’s will, which perhaps exists widely, but the Chinese government can resist this temptation. As it is illegal to fake NBS data, the assumption that the Chinese government can easily exert its will on the NBS actually misrepresents the government’s operation model.

Despite the lowest GDP growth rate, the Chinese economy is not in its hardest times because the slowdown has greatly declined and the public has adapted to the current growth and even a lower rate. As faking a 7 percent figure takes more risk than releasing a lower but real one, China has no motives to forge the data.

The NBS has released numerous economic figures that may not look entirely ideal for China at the time. And today, the anti-corruption campaign has made all the officials more aware of the cost for any misdeed. It is hence groundless to suspect the NBS faked its statistics.

Since the number is 7 percent for two consecutive quarters, a few foreign media outlets were getting jittery. Accusations of crooked statistics are based on unprofessional questions, almost cheap complaints. The growth goal set by the government is around 7 percent, not 7 percent exactly. Since the third and fourth quarter’s growth will probably beat it, the yearly data will likely be higher than 7 percent.

It doesn’t really matter all that much. The glide slope is intact whether it’s a bit steeper or more shallow. We’ve seen some stabilisation but it won’t last long…

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.