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Can Chinese Government Economic Statistics Be Trusted?


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With Signs That China’s Economy Is Slowing, Can Chinese Government Economic Statistics Be Trusted?

Chinese Government Economic Statistics Be Trusted.jpgWith so many crosscurrents affecting the world economy and world economic growth, investors of all types are trying to determine if China’s economy is slowing more than the government’s official data indicates and asking:  Can Chinese government economic statistics be trusted?  The importance of the Chinese economy to future world economic growth prospects cannot be overstated, which is why investors need to know if China economy is slowing to a greater degree than government statistics indicate.

The reality is that China is still a one-party dictatorship that is controlled by the Chinese Communist Party, and the lack of checks and balances makes government manipulation of economic statistics easier to pull than in democracies.  Investors realize that the lack of transparency in the Chinese government structure calls into question whether or not Chinese economic growth numbers released by the government can actually be trusted.

There are strong domestic political pressures in China to deliver economic growth numbers that are above the 7% level that is considered healthy growth by Chinese standards.  Due to political pressures, economists and investors throughout the world question whether Chinese government statisticians are providing realistic estimates of Chinese economic growth, or if the numbers are being manipulated to maintain the official government policy of 7% or better economic growth.

A Look The Discrepancies in Chinese Government Economic Data

Chinese Government Economic Data
Taking a look at recent Chinese economic statistics provides a glimpse of how the statistics are manipulated.  In July 2013, China released its much-anticipated 2nd Quarter Gross Domestic Product (GDP) report, which is a measure of nearly all economic activity within the country.  Many pundits were expecting China’s 2nd Quarter Gross Domestic Product to come in below the 7% growth threshold because a number of indictors were hinting at a slowdown in the Chinese economy.  The official 2nd Quarter Gross Domestic Product, as reported by China’s National Bureau of Statistics, was released on July 15, 2013, showing growth of 7.5%, which was in line with government targets of 7% growth or greater.  While Wall Street cheered the in line numbers, many economists and investors were left to wonder if China’s statistics were telling the true story regarding economic growth in China.

The reasons for skepticism regarding China’s National Bureau of Statistics official 2nd Quarter Gross Domestic Product report are based on other data released by the Chinese government and third party economy watchers that indicate a general slowdown in the Chinese economy that is likely more severe than the officially reported Gross Domestic Product statistic.

How Chinese Government Economic Statistics Manipulate Gross Domestic Product Data

There are many ways that statisticians working for the China’s National Bureau of Statistics can manipulate the official Gross Domestic Product data.  One way that analysts have found the Gross Domestic Product is manipulated is by the irrational and unorthodox method by which government statisticians in China calculate the inflation rate in the Chinese economy, which leads to lower official inflation rate numbers, which subsequently boosts China’s official Gross Domestic Product numbers.

Christopher Balding, who works for the HSBC Business School at Peking University, crunched the numbers and revealed how China’s inflation data is manipulated and how it leads to higher official Gross Domestic Product data.  Balding found that government statisticians in China grossly underestimate housing costs in the Consumer Price Index (CPI) by using unrealistic housing cost inflation data and by using incorrect data regarding the percentage of Chinese that live in rural areas verses urban areas.

Official government inflation numbers claim that housing prices rose by only 8 percent between 2000 and 2011 and that 80 percent of the country’s citizens live in urban areas.  Both numbers appear to be underestimating the rate of increase in China’s housing prices, as an 8 percent increase in housing prices during a period of rapid economic growth does not make sense and, in reality, 54 percent of the country’s citizens live in urban areas.  Urban housing prices are rising slower than rural housing prices in China, so the statisticians’ use of an 80 percent urban population figure skews the rate of housing price increases lower.

China GDP Government statisticians further manipulate the skewed housing cost inflation data in China by underweighting it in the overall official Consumer Price Index.  For the period between 2000 and 2010, housing costs were only 13 percent of the consumer price index (which was raised to 17 percent in 2011).  Many countries assign a much higher weight to housing in their Consumer Price Index calculation, in the 30 to 45 percent range, since housing costs are such a large and unavoidable cost.

Balding concludes that China’s real Consumer Price Index inflation rate is likely approximately 10 percent higher than China’s official Consumer Price Index.  If a 10 percent higher inflation rate is factored into China’s Gross Domestic Product, real Gross Domestic Product in China is subsequently reduced by approximately 10 percent.  This would bring the 2nd Quarter Gross Domestic Product figure in China down below the official 7 percent target to 6.75 percent.

How China’s Gross Purchasing Managers Index (PMI) Data Is Manipulated

China’s official Purchasing Managers Index (PMI) figures that are released by the National Bureau of Statistics also appears to be poorly designed, with data input that skews the official PMI numbers to the high side.  The official PMI in China can be compared to the unofficial China PMI numbers calculated by the bank HSBC, which uses a different set of data points to obtain its China PMI numbers.  The official China PMI released by Chinese government statisticians is sampling of 800 large state-owned companies, whereas the HSBC China PMI is a sampling of 420 manufacturing companies in China that includes many small and medium enterprises.

Although not always the case, the HSBC China PMI is usually lower than the official China PMI that the government calculates and releases, which calls into question the official PMI numbers coming from the Chinese government.  At times of high growth, the discrepancy between the two PMI numbers may not matter much, but with questions arising amongst anxious investors regarding whether China’s economy is slowing and whether Chinese government economic statistics can be trusted, the difference between the two PMI numbers are currently very significant.

For example, China’s official PMI was reported by government statisticians to be 50.3 in July 2013, which is just above the 50 level that indicates manufacturing expansion.  Whereas, HSBC’s China PMI came in at 47.7 in July 2013, which is well below the 50 threshold and indicates a contraction in China’s manufacturing industries.

How To Invest Future Chinese Economic Growth Knowing The Statistics Cannot Be Trusted

There are other factors that indicate that Chinese economic growth is less than the official government economic statistics and call into question whether Chinese government economic statistics can be trusted, from coal and electricity production to consumer demand.  The best way to approach official economic statistics released by the Chinese government is to assume they are skewed to the upside and make investment decisions accordingly.  Regardless of whether or not official government economic statistics are manipulated, China’s economy should continue to grow at a faster rate than many developed economies for years to come.  In the long term, China’s fast growth should translate into higher revenue and profits for companies both based in China and companies that do business in China, which should push equity prices higher.

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