China's struggle to measure economy clouds outlook
BEIJING (AP)—After China reported quarterly economic growth of 7.7% this week—far above anemic U.S. and European performance—global markets reacted by falling, wiping billions of dollars off stock prices.
The reason? Growth came in under the 8% expected by private sector forecasters who relied on Chinese trade and other data.
The market plunge highlighted complaints about the possible inaccuracy of Beijing's official data and the intense, possibly excessive importance traders attach to a handful of Chinese economic indicators.
What matters more than a difference of a few tenths of a percentage point in growth from quarter to quarter is whether Chinese leaders are allowing the private sector to flourish by reducing the role of state industry in the economy, said Ben Simpfendorfer, managing director of Silk Road Associates, a consulting firm in Hong Kong.
"There is an obsession with these GDP numbers, and what really matters at this point is reform," said Simpfendorfer, a former Royal Bank of Scotland economist.
China is watched especially closely because it is a major market for foreign goods from iron ore to smartphones and is relatively healthy, fueling hopes Chinese demand can help offset weakness in the U.S., Europe and Japan.
Confusion about how fast China is growing can hamper foreign and private companies in industries from construction to chemicals to consumer goods as they make plans for business and investment.
Beijing's problems in keeping track of its economy stem in part from the fact that while it is surpassed only by the United States in size, China is growing and changing much faster than any rich country.
An understaffed bureaucracy inherited from the era of central planning is struggling to keep up with changes in trade, finance, manufacturing and city growth. Chinese companies have an incentive to avoid taxes or boost export rebates by misreporting sales and profits. Secrecy surrounding the collection and processing of official statistics leaves open the possibility they might be altered for political reasons.
Foreign and private companies look at government data with skepticism. Many rely on watching their own industries and markets more closely. The government still is the only source for most nationwide data, but a growing number of banks and research firms are developing their own based on surveys of companies and consumers.
"I think everyone doing business in China is skeptical of the data," said analyst Alistair Thornton of IHS Global Insight.
Thornton said three of China's most closely watched yardsticks are rife with potential problems—exports, real estate sales and credit.
Export data have gotten the most attention lately after some analysts suggested companies might be inflating values on customs declarations. That might be intended to let them evade currency controls and move money into China. Reporting rising prices while exporting the same amount of goods might give a false impression of higher production.
The customs agency defended itself this month, saying its reports were based on goods that really were exported. However, that would not prevent exporters from submitting inflated values for them.
March exports were "substantially lower than reported numbers," which might have helped lead to the discrepancy between GDP forecasts and the government report, said RBS economists Louis Kuijs and Tiffany Qiu in a report.
Monday's unexpected decline in reported growth from 7.9% in the final quarter of 2012 was severe enough that economists responded by cutting their growth outlook for China this year.
JP Morgan economist Hongbin Qu scaled back his forecast from 8.2% to a still-healthy 7.8%, while Kuijs and Qiu at RBS reduced theirs from 8.4% to 7.8%.
Data showing rising bank loans and other credit, another key indicator, also might be inflated, according to Thornton. He said official figures might mistakenly count the same money two, three or more times as credit is extended from one company to another and then to a third.
Government figures on home sales also might give a false picture of the strength of the housing market because they rely on seller-reported prices without independent measurement.
Chinese economic growth figures are, like those of other countries, estimates that are often revised later.
Unlike other countries, though, China's revisions can be huge. In 2009, Beijing raised its official 2007 growth rate from an already eye-popping 11.9 percent to 13 percent. That suggested its earlier estimate failed to take account of tens of billions of dollars in economic activity.
Economists also note that even where Chinese data are reliable, they can be pumped up by investment or government spending that might do little for long-term prosperity.
Chinese leaders are trying to nurture more self-sustaining growth based on domestic consumption rather than exports and investment. That will drag down the overall growth rate in the short run.
The World Bank and other advisers have warned that to keep growth strong, Beijing needs to curb the dominance of state industry and encourage free-market competition—a factor that isn't reflected in the headline numbers.
On Monday, China's surprise growth hiccup triggered selling in Western and Asian stock markets. The Dow ended at 14,648, a drop of 1.4% and the Standard & Poor's 500 slumped 1.9% to 1,559.
Thornton noted that last week, global stocks rose after China's report of stronger March trade, even though analysts said the data probably were inaccurate and exports weaker than they appeared.
"We all know markets are not particularly rational and overshoot or undershoot and wipe billions of dollars off market cap off indices over what we think is a misreading of various data points," he said.
Source: The Associated Press