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China growth probably half reported rate or less, say sceptics
August 6, 2015 / 9:15 AM / 2 years ago

China growth probably half reported rate or less, say sceptics

* China Momentum Indicator: link.reuters.com/tym35w

* China rail freight and GDP: link.reuters.com/fyq32t

* China monetary policy and GDP: link.reuters.com/vyt35s

By Ross Finley

LONDON, Aug 6 (Reuters) - China’s economy is growing only half as fast as official data shows, or maybe even slower, according to foreign investors and analysts who increasingly challenge how the world’s second largest economy can be measured so swiftly and precisely.

Beijing’s official statisticians reported last month that China’s economy grew by a steady 7.0 percent in the first two quarters of the year, spot on its official 2015 target.

That statistical stability comes at a time when prices of global commodities, which China still hungers for despite a campaign to rebalance the economy away from investment and manufacturing toward consumer spending, have cratered.

But perhaps the biggest question is how a developing country of 1.4 billion people can publish its quarterly gross domestic product (GDP) statistics weeks before first drafts from developed economies like the United States, the euro zone or Britain, and then barely revise them later.

“We think the numbers are fantasy,” said Erik Britton of Fathom Consulting, a London-based independent research firm and one of the more vocal critics of official Chinese data. “There is no way those numbers are even close to the truth.”

The uncanny official calm in China GDP data may well be contributing to sceptics’ exit from Chinese assets just as the authorities struggle to manage a volatile stock market.

Fathom, which decided last year to stop publishing forecasts of the official GDP release and instead publish what it thinks is really happening, reckons growth will be 2.8 percent this year, slowing to just 1.0 percent next year.

One issue is that so many other forecasters stick to the script. In the latest Reuters poll of mainly sell-side bank economists, based both inside and outside China, the range of opinion is 6.5-7.2 percent. For next year, it’s 6.3-7.5 percent.

“MAN MADE”

Li Keqiang, now Chinese Premier, was cited in leaked U.S. diplomatic cables years ago from when he was Communist Party head in Liaoning province calling GDP figures “man-made” and unreliable. This remains a buttress for widespread scepticism.

Fathom publishes a simple indicator based on three variables that Li said at the time he watched for a better view of how his local economy, and by extension the national one, was faring: electricity consumption, rail cargo volume, and bank lending.

That implies a growth rate of 3.2 percent, and shows a significant decoupling from the official rate since late 2013 based on a plunge in rail freight volumes and below-trend growth in electricity production.

“Clearly nobody believes the data,” said Sushil Wadhwani, a former Bank of England Monetary Policy Committee member and founder of Wadhwani Asset Management LLP.

Wadhwani says he also looks at various proxies of China’s growth rate, which he deems are “pretty unreliable” as well and which suggest anywhere from 1.5 percent to about 5 percent growth.

“I truly don’t know where we are in that range”, he said.

China’s National Bureau of Statistics did not respond to requests for comment on the accuracy and speed of its GDP data.

At its quarterly press briefing last month it defended the veracity of the data, saying critics did not fully understand accounting methods that China uses, and that authorities were continuously refining the accuracy of the figures.

GETTING AWAY WITH IT?

Steady growth since the first of four interest rate cuts by the People’s Bank of China late last year implies those measures have been perfectly successful in preventing a further downturn.

And yet China’s housing market has been slowing for most of this year thanks to a vast overhang of debt-fueled construction since the financial crisis.

Set against the damage from the housing market rout in the world’s largest economy, with less than a quarter of China’s population - the U.S. Federal Reserve is only now getting close to its first rate hike, seven years after Lehman Brothers collapsed - steady growth becomes even more difficult to accept.

The speed at which China publishes its GDP data, sometimes within two weeks of a quarter-end, remains a mystery. The equivalent data for Hong Kong can take six weeks to come out.

Second quarter U.S. GDP data were published two weeks after China‘s, the first of three regular estimates for any same period, and this time came alongside significant downward revisions to U.S. economic growth in previous years.

“For a long time, investors and multinationals have not held the Chinese government accountable for having better data,” said Leland Miller, president of China Beige Book International, a New York-based firm providing anecdotal survey information about China based on the Fed’s “Beige Book” model.

“These people have said ‘it’s good enough.’ So the Chinese have been able to get away with it.”

Not everyone buys into the debate over how much China’s economic growth data may overstate reality.

“Our view on that assertion is that they are the figures we have, the only figures we have, and they will have to do until someone comes up with better ones,” said Carl Weinberg, chief economist at High Frequency Economics. (Additional reporting by Sumanta Dey in Bengaluru; Editing by Ian Geoghegan)

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