Reading (and Misreading) China’s Economy
A wave of articles and data have come out in the last few weeks on the current and future state of China’s economy. Like the Beijing air, there’s nothing clear about what’s going on in the world’s second largest economy, let alone where China may end up by year’s end. Sometimes it’s all blue skies, most other days it’s barely breathable.
CCB’s recent private sector survey dubbed the China “beige book” interviewed 2,000 businesses. According to Bloomberg the report focused on business aspirations painting a contrarian optimistic view. Other official figures, such as they are, indicated slight short-term improvements including low inflation, rising household incomes and a slight rebound in real estate prices.
These stand in stark contrast to the litany of negative economic news. HSBC’s purchasing manager’s index showing continued contraction from a shrinking base. China’s official PMI showed slowing growth bordering on contraction. Local finances are rising to unstable levels as city and provincial officials, eager to prove their compliance with national growth targets, took on enormous debts apparently with no way to pay them back. Industrial production figures, electricity usage, and stock market performance all point to harder times ahead. Add to that weak retail sales and price wars and the slowdown looks deeper and more significant.
Chinese government officials, most notably Premier Wen, consistently warn of more problems to come. Two recent China bank rate cuts highlight where economic policymakers stand. Time to re-start the lending engines, but the quality of that money flow remains questionable. There has been no fundamental reform of the banking sector (see “Red Capitalism” by Walter and Howie for a book length analysis or Michael Pettis’ blog for current warnings.)
One problem with any soft data survey in China is the tendency for those interviewed to inflate or underestimate their sense of where things are and where they’re going, depending on the climate. Information is political currency and the control of that currency like the yuan is a complicated business. For economists accustomed to watching the hard numbers more than than aspiration of consumers or businesspeople the obscurity of statistics is particularly acute. Anyone attempting to invest in a Chinese company is well advised to examine the first set of books, scrutinize the second and try to find the third.
This lack of transparency, and the desire to avoid the accountant’s incisive gaze has now shown up in Chinese companies delisting from U.S. stock exchanges because of the perceived onerous reporting requirements of regulators. Sinoforest with its “irregularities” ended up in bankruptcy. Moody’s reported 49 firms with increased risk a year ago and the questions keep coming with Hong Kong listed firms now ringing alarm bells. The U.S. is no stranger to scandal. Too bad the SEC never got around to investigating Lehman Brothers, but a familiar wind blows through China’s financial markets these days too similar to the schemes and funny money business of Wall Street.
Another problem is the tendency to make sweeping claims from short term data. One or two months does not a trend make, but eager media cycles and investors selling their latest decisions to move money in or out constantly claim the higher ground. That the Shanghai composite index is down 15% from its May 2012 high either means investors are fleeing a sinking ship, or the market is attractively undervalued.
Conversations about hard vs. soft landings miss the main point of China’s rise and recent slowdown. Years of muddling through after such wild growth may do just as much damage as a U.S. style banking crisis. Either way the economy is in for a rough ride. Watch the middle class for signs of where China is headed. They’re the country’s real future.
Photo: Shanghai Shopping, (c) Brian P. Klein, 2012