Everybody assumes that official Chinese economic data is cooked. Lower level officials tell their bosses what they think they want to hear. The bosses in turn try to move markets and regulate the economy by their own manipulation of the data. After all it’s a whole lot harder to actually reduce the money supply, for example, than to simply release data showing that money supply growth is falling. And in the short term releasing manipulated data often gets the job done.
But if you’re trying to forecast the longer range course of the Chinese economy, bad data makes a tough job almost impossible.
Take today’s (July 14) release from Fitch Ratings, along with Standard & Poor’s and Moody’s one of the big three in credit ratings.
Lending by Chinese banks in the first half of 2010 was 28% higher than the official numbers, Fitch said. The official numbers don’t capture loans that were repackaged into other investment products and then sold by the banks to other financial entities in an informal securitization. At the end of June, according to Fitch, more than 2.3 trillion yuan in loans had been moved off bank balance sheets and into securitized investment products. That’s 10-times the level at the end of 2007.
After adjusting for this informal securitization, new loans for the first half of the year came to 5.9 trillion yuan ($871 billion) rather than the 4.6 trillion yuan announced by the People’s Bank of China.
The difference between the Fitch numbers and the China central bank numbers are hugely significant.
Last year China’s banks released a flood of 9.59 trillion in new loans on China’s economy. That set off massive worries about a potential mountain of bad debt at China’s banks and fears that bank lending at that level would push China’s economic growth to unsustainable levels. In response China’s government set a 2010 target for new loans of 7.5 trillion yuan.
See the difference between the Fitch and the People’s bank numbers? If you use the official numbers bank lending is still too high since it’s on a path toward 9.2 trillion yuan in new loans in 2010 if lending in the second half matches first half figures. New lending would exceed official quotas by 23%.
But if the Fitch numbers are right, China’s banks on a path to 10.8 trillion yuan in new lending in 2010—more than the 9.59 trillion yuan in new loans in 2009 that has generated so much worry. The Fitch numbers show China’s banks exceeding the 2010 quota for new loans by 44%.
The People’s Bank said just last week that loan growth in the first six months of 2010 was reasonable. I leave it to you whether exceeding the quota by a projected 23% is reasonable. But clearly breaking the quota by 44% and lending more in 2010 than in 2009 wouldn’t be.
If the Fitch numbers are anywhere near right, then investors should be looking for even more tightening of loan restrictions and reductions in the money supply in the months ahead. China’s Shanghai stock market, which has recently started to anticipate an easing of current restrictions, wouldn’t like that.
But if we’re going to be skeptical of official Chinese data, we should also be skeptical of data from Fitch and other outside observers. What reason do we have to think Fitch is correct?
No hard data to confirm Fitch’s numbers but judging by recent actions in Beijing I’d say Fitch is on to something: In early July the China Banking Regulatory Commission issued a temporary ban on informal securitization.