Fishy Economic Data and the China Crash

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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  4 comments for “Fishy Economic Data and the China Crash

  1. lucas
    Jun 25, 2012 at 6:07 am

    Hey Wolf, the inner workings of China are way different than the west..While living in New Jersey and taking the I 287 over the tappanzee bridge , i could read uptick or down turn on the U.S economie by how many truck traveled the road on my daily trip at 4.30 am.

    in China railroad is the main link between citys and lots of stuff is made localy for each city, i live near the great wild goose pagoda ,, a great tourist shopping entertainment area ,, you would think all building would be packed everyday with people , and yet some prime locations around the pagoda area are empty , and yet plenty of people around for good business,, but what is the right business, its very hit and miss, and turnover in all locations is very high.
    other area's that would not worth your time , have no empty store locations and rents are very high , the Chinese shopper is not like the western shopper , they are willing to pay steep prices for some stuff and bargain on the daily needs and to create profits on the daily needs and that is most stuff we buy the quality goes down so the manufacture and retail can make some profit.

    also collecting economic data on1.4 billion is not that easy , even in the usa its not accurate.
    in China huge sections of citys get leveled and rebuild so it takes time for all familys and then some to come back to those sections and when westeners pass by its called an empty city
    when i moved in this neighborehood it was very quiet, with all roads being 4 lanes, did wonder about living here , now 2 years later and not all building fully occupied i wonder how much of a parking lot the roads will become if all appartment are occupied and everyone has just 1/2 a car.
    but one thing is for sure ,, 1.4 billion people and not being able to sell anything????, China will have a good future ,, but ironing out the problems will not be easy. lets hope the Chinese top goverment leaders will not be like western war seeking leaders but try to find peaceful means.

  2. Wolf Richter
    Jun 25, 2012 at 2:29 pm

    Lucas – thanks for your comments, always! I sent you an email.

  3. Binko Barnes
    Jun 25, 2012 at 6:13 pm

    All around the world, here, in China, in Europe, we see the same thing. The productive capacity exists. Goods can be produced in abundance. But the means to purchase the goods are not getting distributed out to the lower and middle levels of society.

    In China the manufacturers may be able to produce 20 million vehicles or more. But the wealth to buy them is not trickling down to the people who want them. The wealthy have forgotten Henry Ford's maxim about paying the workers enough to buy the goods they help produce.

    This creates a disconnect between production and consumption and forces those in power to phony up the numbers to maintain illusions. The rich have gamed the system so that they can skim off a disproportionate share of the available wealth. But the game is getting harder to maintain and requires more and more pretense.

  4. Ed
    Jul 9, 2012 at 10:19 am

    So we are supposed to believe that the Chinese consumer is going to make up for the lost exports to the EU and USA.

    Really? http://money.cnn.com/2012/06/26/news/economy/china-middle-class/

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