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Saturday, May 5, 2012

Numbers that look too good

Special to The Japan Times

HONG KONG — Economist Patrick Chovanec's claims that China's official economic statistics about inflation and growth do not match the reality that he is experiencing in the tough actual world caused the jaw of a Bloomberg Television news anchor's to drop.

"What are you saying?" she said, then repeated, "What are you saying?" in disbelief.

He added that China might be experiencing an economic "contraction," not the 8-plus-percent growth that Beijing and its adoring followers have claimed. This flustered the news anchor even more, though she recovered to say, "Oh, my goodness, what does that mean for a hard landing?"

It wasn't quite a moment where the small boy reveals that the emperor really has no clothes and is in his birthday suit. After all, China's growth has been miraculous, though there are plenty of myths and mirages surrounding it. Nevertheless, it was refreshing to hear the challenge from Chovanec, who lives and works in China as associate professor of the Tsinghua University School of Economics and Management.

One of the wonders of modern economic times is how super-efficient sprawling China is when it comes to producing economic statistics, faster even than Japan or the United States. Yet more remarkably, China is coming up roses, with prices rising at 3.6 percent, below target, as growth of gross domestic product hummed along at 8.1 percent a year in the first quarter, a bit slower than the country has gotten used to, but healthily higher than Premier Wen Jiabao's 7.5 percent target.

When Beijing published those quarterly gross domestic product figures, just 13 days after the first quarter had ended — Beijing would walk away with the gold medal in the sprint statistical Olympics — most economists agreed that the worst was almost over. Reuters added that loan data suggested that an economic comeback was on the horizon.

HSBC predicted a rise to 8.3 percent in the second quarter, while other bank economists quoted in the international media said the rest of the year would see China slowly gathering pace. The International Monetary Fund averred that in 2013 China's growth would be back to 8.8 percent. The World Bank is slightly more cautious, forecasting 8.6 percent after 8.2 percent this year.

But hold on, didn't anyone stop to ask some simple questions and ask whether, even if true, the numbers are too good to be true? Thank goodness for academic economists like Chovanec and Michael Pettis, Peking University professor, for trying to keep China and the world honest.

Chovanec's comments, on Bloomberg and in a subsequent blog, were mainly about the inflation figures because that was the topic of the day, but he added important pertinent observations on industrial production and the economy in general: "I am not saying that anybody is a liar, but I think that you can come up with a number that may not necessarily reflect the reality that people are experiencing."

He cited his own experience that the fresh milk delivered to his doorstep had just gone up from 6 yuan to 8 a bottle, a rise of 33 percent, not the 3.6 percent official consumer inflation rate.

"I am not claiming that consumer inflation is actually running at 33 percent. I'm simply offering an example of the kind of head-turning price hike that remains an all-too-frequent experience despite the government's declared 'success' in getting inflation under control."

He adds that his KFC meal, of a large popcorn chicken, small fries and large Coke, costs 33 yuan today, up 53.5 percent since his first check 32 months ago; that the price of a local business buffet has gone up by 27 percent a year; and that petrol is 50 percent higher than three years ago.

Chovanec stops short of saying that China's statistical bureau is lying since, after all, the consumer price index is derived from a basket of goods and only the officials know what is in the basket. Taxi fares are almost certainly in the basket, and their charges have not changed since 2006, apart from a small fuel surcharge. Pork probably is, which may be why Beijing dumped a big chunk of its strategic pork reserves on the market last summer.

But the economist's remarks about the economy, in general, also stood out against the optimistic trend. Chovanec's most recent blog states, "There is reason to suspect that the Chinese economy may be growing substantially below China's reported real GDP growth rate of 8.1 percent for Q1, and may actually be in contraction (negative growth)."

He adds, "Chinese companies I have talked to are seeing flat performance, near zero growth, in Q1, compared to last year."

He stands out from the general crowd of China bulls, apart from Pettis and maverick investor Marc Faber, who told Abu Dhabi's alarabiya television channel last month: "The Chinese government economic figures are meaningless, because they are manipulating most of the economic data, which confirms that there is no economic growth in China this year. In fact, China's production of steel, cement and electricity, as well as the volume of its exports and car sales, are stable or declining compared to last year, which is incompatible with the growth announced by the government."

Chovanec adds: "Of the companies that I talk to throughout China, there isn't a single one that is looking at an increase in revenues or an increase in profits this year. They are struggling to stay even. That doesn't sound to me like a rapidly growing economy. If you talk to investors, anybody, bull or bear, who isn't completely delusional, is looking at downside risk in China. Most people I talk to are struggling to get through a flat year."

China has been dependent on investment growth for over half of its GDP growth for several years, and Chovanec points out: "If investment merely remains stable compared to last year, you could lose 5 percentage points of GDP, bringing GDP growth to 4.5 percent. That's just simple math." He believes that a lower rate is more in line with China's real economic life today.

Chovanec does not quite square the circle to assert that a slowdown in investment might be good for China, as long as the slack is picked up by a growth in consumption, and ordinary Chinese begin to share the economic miracle. That is the critical question. But the World Bank attributes China's growth slowdown this year to slowing consumption growth along with decelerating investment and weak external demand.

A hard landing in China would be bad for the country and for the world. It is better to be critical and honest than to fudge and get a nasty surprise. But too often economists throw away critical thinking as soon as China, miracle and mirage, is mentioned.

Kevin Rafferty is editor in chief of PlainWords Media.

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