An unrelenting, horrid wave of scandals about toxic ingredients in foods and medicines in China shows that regulators are unwilling and incapable of controlling it. It also shows a penchant—some evil tongues say it’s cultural—for pandemic cheating in order to get ahead in some way. And Chinese economic data falls into that category.

Every country has its own bureaucratic madness in pursuing obfuscation. In the US, one of the hardest things to get is a truthful, or at least a somewhat realistic, or at the very least a not totally fabricated unemployment and jobs number. But at least, the Bureau of Labor Statistics issues a slew of supplemental data. So, in addition to the nearly worthless headline numbers that media and politicians wave in proclaiming victory, we get numbers that point at deeper fissures [for a fun head-butting on this issue, read Yves Smith’s post!].

But in China, the art of data manipulation is such that even the government might not know the true status of the economy. Officials even at the local level are rewarded, promoted, or demoted, based on achieving their economic quotas as measured by tax receipts, business revenues, real estate developments, and so on. Hence, the incentive to fudge the numbers on an individual basis is high. According to the New York Times, “The officials do so by urging businesses to keep separate sets of books, showing improving business results and tax payments that do not exist.”

As the fudged numbers flow upward and are consolidated, they aggregate into a fudged whole, inflating GDP by 1 to 2 percentage points. But it might be a lot worse, and sometimes it’s just the way it’s counted.

Auto sales, for example. A crucial economic data set. But the way they’re reported, even if they were accurate, make them useless for estimating the health of the auto industry or the consumer. In May, they jumped 23%, higher than analysts had expected. The media drooled. Toyota and Honda nearly doubled their sales. Ford pushed 23% more units out, GM 21%. BMW sales soared 32%. Everything was simply outstanding.

Alas, they’re wholesales to distributors, not to consumers. In the US, auto sales are based on sales by dealers to retail and commercial customers. In Europe, they’re based on new vehicle registrations—when customers get the tags. This is even more accurate than dealer sales; just before cutoff, dealers scramble to push every possible unit into the system to beat the other dealers in town, and in the process, a few half-baked units slip through; later, when the down-payment check bounces or whatever, the sale will have to be backed out, showing up as a negative sale the next month. So the fudged numbers are small and self-correcting.

But in China, auto sales are reported as wholesales—when vehicles leave the plant. And while these numbers were stunning and glorious, at dealerships the scenario was gruesome: sales in May couldn’t digest the flood of production. Inventories on lots across the country ballooned from 45 days’ supply at the end of April to 60 days’ supply by the end of May—a dizzying 33% increase in just 30 days. And the ballyhooed 23% increase remained unsold. Added to inventory. Channel stuffing. Rampant overproduction and weak retail sales.

So, to feel their way through the inaccurate data fog, many foreign observers, and also Chinese officials, have been trying to find alternative measures that are less prone to cheating and manipulation. And electricity generation has been seen as a reliable, no BS indicator of what’s really happening in the economy. Such basic industrial data is hard to manipulate.

Not for the Chinese. Turns out, stockpiles of coal, the main fuel for Chinese power plants, has reached record levels as demand from power plants, which should have been increasing in a growing economy, has plummeted as a function of plummeting demand for electricity. And now, according the New York Times, even the government is investigating the signs that reported electricity output was exaggerated.

When the economy is hot, there is less incentive to cheat, but when it’s slowing down, though the quotas don’t allow for it to slow down, cheating becomes a career imperative. And “Government officials don’t want to see the negative,” said a chief executive. So these officials pressure the industry to wipe away any decline in consumption by reporting it as flat.

In Shandong and Jiangsu, where heavy industry plays a big role, electricity consumption has plunged more than 10% in May compared to prior year. Similar trends have been observed in Western China. While official data has been showing a slowdown of the Chinese economy from its torrid pace to a growth rate that would still be stunning in the US, electricity consumption suggests that the slowdown is much steeper. Anecdotal evidence to that effect has been popping for a while—to be negated by decent official numbers. And one wonders how long this charade, even in China, can be kept up before reality sullies it.

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