Has Chinese Economic Data Been Falsified to Hide Degree of Slowdown?June 23, 2012 @ 1:23 PM EST
There is a major story breaking (New York Times) that China's manufacturing data may have been falsified. Worse, the story cites sources, by name, that state that this has been taking place for some time and that it continues now.
If true, and longer term readers will recall I have believed this to be the case since 2011, then it could provide at least a partial explanation as to why crude oil, coal and other commodities have been under pressure since May.
I highly recommend reading the actual NYT story . However here is a snippet that tells the majority of the story:
“Prominent corporate executives in China and Western economists say there is evidence that local and provincial officials are falsifying economic statistics to disguise the true depth of the troubles.”
Here’s another…officials in some cities and provinces are also overstating economic output, corporate revenue, corporate profits and tax receipts, the corporate executives and economists said. The officials do so by urging businesses to keep separate sets of books, showing improving business results and tax payments that do not exist.”
According to the Times, the discrepancies may be enough to “falsely inflate a variety of economic indicators by 1 or 2 percentage points.”
So, if you thought analysts were concerned about China’s economy growing at a rate of just 7.5% or so, imagine what the concern would be if that rate was “1 or 2 percentage points” lower.
As to the markets, a "surprise" negative revelation often sends markets tumbling. The question is: Was this already baked in to the "market pie" and thus unlikely to cause a reaction? My estimate (S.W.A.G.) is that this will unsettle some market players.
For example, per the New York Times story, Mark Mobius of Templeton Emerging Markets Group cited the official reported electricity usage figures as evidence that the Chinese economy wasn't doing all that bad. It seems reasonable to assume that he made or maintained certain investments based upon what he felt was an attractive situation. If that now proves to have been an erroneous conclusion based upon falsified data it would not be surprising to find that Mr. Mobius is "re-evaluating" his stance.
If money managers and other players have, in fact, been relying on Chinese economic data which now appears to have been false, then at least a portion of their analyses which led to various investment decisions is now called into question. If investments were made based upon reports which painted an overly optimistic picture then managers may act to reduce or even eliminate their positions until they can develop a more clear and accurate estimate of the future economic outlook for China.
As bad as the impact may be of the true, now lower, growth outlook for China and the region, it is the ripple effects upon the global economy which could be the real focus of concern. Remember that China had been seen by many as the new dynamic growth engine which would pull up the struggling economies of Europe and the USA.
If China is going to have a hard landing rather than a soft one then who's left to save the planet?
If we, and all the various other "players" worldwide, must now add a contracting Chinese economy to the worsening economy in India, the cratering economic situation in Europe and the stalling/rolling over economy in the US; well then we're looking at a picture that isn't very pretty. In fact it's downright ugly.
Perhaps though, traders and investors won't react in any dramatic fashion. After all, it's only a story in the New York Times (no sarcasm meant here) and thus it could be brushed off for now. Let's face it, the markets have ignored many other issues and chugged onward, fueled by the "hopium" of more QE.
What a powerful drug!
Have a good one...
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