China Battles Bad Economic News With Rosy Analysis, Suspect Data – Analysis
By Michael Lelyveld
As doubts about China’s economy mount, the government has turned to confidence-building statements and questionable data to make its case for official growth rates.
On Sunday, the government released a series of disappointing figures for August, undercutting assurances given by Premier Li Keqiang at a World Economic Forum meeting last week.
At the conference in the port city of Dalian, Li told investors that “positive factors in economic growth (are) increasing and (the) economic index has started to pick up after previously falling,” according to the official English- language China Daily.
But three days later, the National Bureau of Statistics (NBS) reported relatively slow growth in key industry and investment indicators that fell short of consensus forecasts compiled by Reuters and The Wall Street Journal.
Industrial output rose 6.1 percent, up slightly from 6 percent in July but below forecasts of 6.4-6.6 percent.
Growth in fixed-asset investment in the first eight months dropped to 10.9 percent, the weakest in 15 years, Reuters reported, with property investment up only 3.5 percent.
Qu Hongbin, chief economist at HSBC in Hong Kong, said the numbers “fell below general market expectations,” the official Xinhua news agency reported.
Last week, Xinhua said its consumer confidence index fell for the third month a row due to stock market fluctuations and losses in personal wealth.
But the glum news was coupled with the release of a reform plan for state-owned enterprises (SOEs), timed to brighten the outlook for investment in the lagging industrial sector.
Little market enthusiasm
The guideline issued by the Communist Party Central Committee and the State Council, or cabinet, will promote “for-profit entities” among SOEs and “boost the economy,” Xinhua said.
China’s stock markets showed little enthusiasm Monday after the SOE plan “turned out to be less far-reaching than many hoped,” the Financial Times reported. The Shanghai Composite Index fell 2.6 percent and other indexes lost about 7 percent.
But the attempt to pair good and bad news followed a pattern in recent weeks as the government tries to persuade markets not to overreact negative reports.
In an unusual move on Aug. 30, the nation’s top planning agency released partial figures for the month on power use and rail tonnage, both showing “better-than-forecast” results, according to Xinhua.
The National Development and Reform Commission (NDRC) said power consumption between Aug. 1 and Aug. 28 rose 2.97 percent while railway cargoes in July gained 5.8 percent from the year-earlier periods.
In a news analysis, Xinhua was frank about the reason for the early release of the electricity data on a Sunday before the end of the month and the stock market opening on Monday, saying the figures were announced “ahead of schedule to reassure markets.”
But the preemptive publication of positive numbers only prompted more questions about China’s economic performance and the reliability of official reports.
China watchers said the NDRC announcement of partial and selective monthly figures was rare, if not unprecedented.
“Both the timing and the numbers are plainly suspicious,” said Derek Scissors, a China economist and resident scholar at the American Enterprise Institute in Washington.
Instead of building confidence, the move raised doubts about why the NDRC decided it was necessary.
The release came within hours of a statement by the Ministry of Public Security that it had punished 197 people for spreading rumors that “caused panic, misled the public and resulted in disorders in (the) stock market or society.”
The penalties were aimed at a broad range of reactions to sensitive events including market movements, the Tianjin explosions and the Sept. 3 ceremonies marking the 70th anniversary of the end of World War II, Xinhua said.
In one prominent case, a journalist at Caijing business magazine was arrested for reporting that the China Securities Regulatory Commission (CSRC) was seeking to withdraw funds from the stock market, according to Western media.
A CSRC official and four executives of CITIC Securities faced punishments for insider trading and other violations, Xinhua reported.
The penalties were seen as having a chilling effect on the Chinese market and investment.
The Shanghai index dropped 3 percent in morning trading the next day before recovering to close with a slight gain.
“The crackdown smacks of desperation,” The New York Times said in an editorial, adding that “jailing might scare journalists and social media users …, but it won’t help the broader economy or the financial markets.”
The NDRC’s “good news” appeared aimed at counteracting effects of the crackdown, but the rosy numbers may have only heightened concerns that China’s gross domestic product (GDP) has been growing at less than the official 7-percent rate.
There have been few signs before or since the NDRC announcement to support the optimistic view that it tried to promote with selective data.
“This is an odd story, as everything else points to GDP growth significantly lower than 7 percent,” said Philip Andrews-Speed, a China energy expert at National University of Singapore.
A week after the NDRC release of partial figures, the agency cited a report from the State Grid for the full month of August, showing that power consumption rose 2.47 percent, a half of a percentage point less than the previous growth claim.
Even the smaller increase may be open to doubt. On Sunday, the NBS reported that power generation last month rose only 1 percent.
While the reported gain in electricity use would be slight by China’s historical standards, it would still represent a turnaround from the 1.3-percent decline in July and the 0.8- percent growth rate reported for the first seven months of the year.
The rail tonnage increase of 5.8 percent seems even more unlikely in light of the 10.1-percent plunge in cargoes reported by the NDRC in July for the first half.
The agency argued that rail traffic during the partial August period continued to rise by 1.2-percent “as the need for coal, steel and oil stabilized.”
That view was undercut two days later when the National Bureau of Statistics (NBS) released its official manufacturing purchasing managers’ index (PMI) for August with a rating of 49.7, marking the steepest slump for the indicator of industrial output in three years.
The news triggered a renewed selloff on world markets as the Dow Jones Industrial Average plummeted 2.8 percent after a week of seesawing over China reports. Any PMI reading below 50 is a sign of contraction.
On Sept. 6, also a Sunday, Xinhua released another optimistic CSRC statement, saying that the “stock market has stabilized and risks have been released to some extent.”
But the next day, the Shanghai average fell 2.5 percent after the People’s Bank of China (PBOC) said it had spent U.S. $93.9 billion from its foreign exchange reserves last month in efforts to prop up the yuan.
The episodes may soon be forgotten in the clamor of daily volatility, but the government’s attempts to sway the markets with cherry-picked data have added to doubts about the validity of its reports.
China has struggled for over a decade to improve the reliability of NBS economic reporting, famously derided as “man-made” and “for reference only” by Premier Li Keqiang, when he was Communist Party chief of northeastern Liaoning province in 2007.
The agency has pursued a series of reforms to stop localities from fictionalizing production figures and to keep provincial GDP claims from topping national totals.
Data inflation in China mattered little to world markets, as long as investors could assume the economy was expanding and see the evidence in indicators like power consumption and commodities like coal, oil and gas.
But drops in the indicators to single digits and negative growth have coincided with China’s increased influence on world markets, triggering sharp investor reactions and sudden disillusionment with official GDP reports.
Beyond the NBS problems, analysts face disorganization of economic data with production and consumption figures coming from other agencies like the NDRC, the National Energy Administration (NEA) and industry groups. These are often elliptical, unexplained or at odds.
The NDRC statement on Aug. 30, for example, implied that electricity use in July fell 2 percent, magnifying the August recovery, after the NEA reported a July drop of 1.3 percent.
Such differences matter less than the bigger gaps between power consumption rates and official GDP and arguments over whether electricity use should be seen an indicator of actual economic growth at all.
Power consumption as economic measure
In postings at the Peterson Institute for International Economics in Washington, China economist Nicholas Lardy has taken issue with doubters of the official GDP data, arguing that they ignore the country’s transition to a service and consumption-led economy that uses less electricity than in the past.
“Assuming that electric power growth is a good proxy for China’s overall economic expansion is like trying to drive a car by looking in the rearview mirror,” Lardy wrote in a New York Times op-ed last month.
But in releasing its selected data, the NDRC has made its own case for citing power consumption as a “key economic indicator.”
“Power use and rail freight are two advanced indicators for the economy, and their rise suggests more rapid growth in industrial output and a rising trend in the broader economy,” Xinhua said in its report.
In one sense, arguments over indicators and actual economic growth rates may be overshadowed if markets continue to react to doubtful data from China, causing investors and consumers to pull in their horns.
Further tests of the reactions are likely to come in the next month as the NBS and other agencies unveil their sequence of September reports and what may be a moment of truth with the official GDP estimate for the third quarter.
If the government sticks with a 7-percent growth rate that portrays the economy on an unfaltering course, it may suffer a greater loss of credibility unless a broader range of indicators appear in support.