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.
Ed McGon – “private sector” in China? Are you kidding??
cgegax,
What you just said cannot be repeated enough. This is EXACTLY why I tend to overlook Chinese “corruption”, and faulty numbers. This is no better nor worse than what happens in the U.S.
So where does the difference lie? Simple: What is the difference between a large cap and a small cap stock? In China, there are plenty of well-capitalized small cap stocks. In the U.S,, small cap stocks are normally leveraged out the wazoo in debt. In both countries, all large cap stocks are politically connected, one way or another.
When a company becomes successful in the U.S., they end up getting a political smackdown. In the U.S., they can expect to be dragged into court for anti-trust violations. In China…well, in China, a company doesn’t become a large cap in the first place WITHOUT political connections. It’s just two different ways to ensure TPTB get theirs.
Are we comparing 2010 loan numbers “all in” (official plus securitized) versus 2009 official numbers only? How much was securitized last year? This may not be as bad as it sounds. (And didn’t Jim make a post a while back about how the Chinese government will most likely brute-force fix any major problems of Chinese banks?)
And yes, it is difficult to evaluate investment opportunities with distorted (often intentionally) fundamental numbers, but this is not a China problem. Every government tries to present statistics in the best possible light (i.e. US unemployment, inflation, deficit, etc).
The financial markets are stacked in favor of the wealthiest and best connected, who either have better information or are part of the manipulation. It’s easy to see this in China as we have a fresh set of skeptical eyes, but it happens in the US as well, we’re just more used to it. One of the many ways the rich get richer, and everyone else is left to fight over scraps.
The best we can hope to do is take all information with a grain of salt, make up our own minds about the true reality underneath, stay away from “to good to be true”, hope for the best and prepare for the worst.
jaydew,
Contrary to what the analysts are saying, I think it is more of a case of dollar weakness than euro strength.
I wouldn’t pretend to know the real numbers (my guess is Fitch is closer) but the big picture seems to be that China’s current model is emulating the US circa 2004.
I think we know how that worked out.
How good are the “official figures” on the growth of China’s, have they cook those numbers too? If their economy is not as strong as they say, then it might follow that they would actually be encouraging more lending as a stimulus. It’s just a matter of trying to figure out if the lie is bigger then we think.
Count me as a skeptic on China. Chinese stocks could be a good investment at the right price, but with the lack of transparency I don’t see how you determine what that price is. Also I’m uncomfortable with all the talk of gloom-and-doom for the US and the great investment case for China. Markets do have this perverse tendency to move in the opposite direction to investor sentiment.
“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?”
Fitch wants to be Meredith Whitney or Roubini – and is challenging a government that wants nothing but positive spin (and will make them pay for reporting anything outside the party line).
Concur about general skepticism being warranted – but given the economic incentives at work here, I see better reason to trust Fitch and exercise caution. If the bureaucrats all have a strong incentive to lie, then the government also has a strong incentive to make sure foreign shareholders pay first to clean up any messes.
Jim,
I suppose the idea is we’re waiting to jump into China when the market hits bottom? All the technical signals (and your observation about money market fund data) are supporting a rally, seems like a good time to buy US securities at least.
I just sold EUO myself. Greece just had a quite successful bond sell, the spanish banks are stabilizing, and new numbers of growth (shrink) predictions for Europe GDP make the old numbers look pessimistic.
On the other hand VIX is really low right now, a better hedge at this point is to buy some VXX.
Ed, what is your opinion on the recent Euro strength? I believe you were shorting it for awhile.
Translation: China’s government really doesn’t have very good controls on the money flowing into the private sector. The good side: Businesses will have free access to all the money they could need, which in turn will lead to greater business growth there. The bad side: Watch out for inflation!