Analysis of China’s economic fundamentals
Is there absolute truth in its publication of the statistics?
The Chinese economy has been growing tremendously for the past decade, and it was especially so post Global Financial Crisis (GFC) of 2008 – 2009. With the growth come issues such as economic sustainability, questions over the ability to sustain continued trade growth along with slowing developed economies, such as the Euro Zone area, its various claims towards its territorial boundaries in order to sustain continued domestic and international growth, containment of social discontent among the majority of the Chinese population over standards of living, environmental protection policies, etc.
The topic discussed in this article has grown in importance over the past year or so, when many members of the international financial community are questioning whether China’s economic growth is depicting the truth that is happening on the ground. In a recent Bloomberg.com report dated May 8, 2013, the General Administration of Customs in Beijing released trade data for the month of April showing a 14.7 percent increase in exports, and the majority of the exports were led by a 57.2 percent jump in shipments in Hong Kong. Analysts from Bank of America Corp. and Mizuho Securities Co., interviewed expressed some scepticism over the integrity of the data, as the trade data showed that shipments to US and Europe fell due to the ongoing slowdown in the major European countries such as Italy, Spain, Cyprus, Greece, and the uncertainty over the fiscal showdown still being debated in the US Congress which hampered production spending among many US businesses.
Several investment banks that track closely on China’s economic growth cast doubts over the reliability of the trade data, with Royal Bank of Scotland, Plc saying that export gains may be overstated by 9.0 percentage points. Following the release of China’s April 2013 trade figures, regulators have responded by announcing a crackdown on companies using trade reports to disguise speculative monetary flows chasing an overvalued Chinese Yuan currency that had outpaced the previous year’s gains against the US Dollar.
The questions surrounding the release of the April 2013 trade data was also further illustrated by the private sector surveys, most notably the monthly HSBC China Composite PMI ™ data (which covers manufacturing and services) which indicates that although there were indications of expansion of output for the eight consecutive month in April, the HSBC China Composite Output Index showed a marginal rate of growth, posting at 51.1, which was down from the March figure of 53.5, suggesting the pace of expansion was the slowest since October 2012. The services sector as indicated by the HSBC China Services Business Index recording 51.1 in April, which was down from 54.3 in March, which also indicates the weakest expansion of service sector activity since August 2011. Basing on various data compiled and tracked closely by private sector institutions, there seems to be a conflict over the reporting of China’s economic growth outlook, most notably on the Chinese government’s side of the data releases.
Given the widespread controversy over the integrity of China’s macroeconomic data, and the continuing scepticism surrounding the release of such economically sensitive data, there are questions over China’s motivations and the integrity of its government institutions. Given that China runs on the centrally planned administration, it is inevitable that government policy makers would want to boost their standing among the Chinese people and the international community. However, such appeasement does not bode well for China’s international standing over transparency and responsibility towards the international community as outsiders will continue to cast doubt over China’s macroeconomic data, leading to false expectations, and could have severe repercussions if there were to be another global economic slowdown in years to come. The Chinese economy was essentially holding up the global economy during the initial months following the onset of the GFC, with its economy registering a decent annual growth of approximately 8.0 percent to 9.0 percent, despite the global slowdown that was happening at that time owing in part to its cheap labour, the size of the population which stands at over 1.0 billion, and engineered growth coming from the central planning authorities in Beijing. In addition, China’s hosting of the 2008 Olympics gave rise to an increase in infrastructure spending, generated domestic demand, and created jobs. The timing of the event and the benefits that followed has essentially allowed China to achieve a soft landing at that time, but post Olympics, issues start to emerge among the financial community on whether China’s growth in sustainable in the long run.
Although there has been a recent change of leadership within the Chinese Politburo, as seen by the transfer of leadership power following the conclusion of its annual Chinese National People’s Congress in April, there has not been much progress over the issue of its economic data releases. It is quite understandable that it is still quite early in the weeks following the transition of leadership power, but the authorities should have announced a detailed reform plan that will be essential in providing reassurance over the running of its public administrations and future economic data releases. There should not be any mishandling or alleged massaging of the data in order to gain the trust of the international community. The international financial community will be watching for any signs of improvement over future statistical data releases out of China, which could prove crucial in the gaining the trust and recognition of the entire Chinese leadership, and future standing among the international community.