by Christopher Balding
The NanfangToday, 8:45 AM
The release of perfect GDP data in China prompted a big enough collective eye roll that Beijing mouth pieces took to the editorial pages to respond to accusations of dubious data. Most observers outside the National Bureau of Statistics China and the Global Times accept that headline GDP data is questionable (to be extremely polite) but wonder what the implications are.
FT Alphaville puts forward two questions, specifically why does the Chinese government put out the dodgy statistics and do they have better data than we do? They answer these questions well but I would go further asking the fundamental question: why does dodgy GDP data matter? There are many reasons we should be concerned about the quality of data.
First, it directly impacts our estimates of debt to GDP ratio. Let’s take a simple example and assume that over the years GDP has been overestimated by 10 percent. Now let’s assume that total non-financial debt is three times GDP, not far off in reality. If GDP is really 90 percent of official GDP, this increases the debt to GDP ratio from 300 percent to 333 percent. Given the already high estimates of the amount of Chinese GDP needed to service outstanding debt, this would increase GDP dedicated to debt service even higher.
Second, if the headline data is questionable, you can bet that official underlying data and significant amounts of corporate data is just as questionable. For instance, the big four state owned banks are overseen by the China Investment Corporation, which is owned by the Ministry of Finance. Both the Ministry of Finance and the National Bureau of Statistics China report to the State Council. In other words, the banks and the NBSC have the same boss. It seems unlikely that the NBSC is some rogue organization within the larger whole. The banks just like the NBSC know the expected numbers and will do what is necessary to submit them.
In fact, strong evidence that Chinese banks are submitting similar dodgy data. While NPL ratios are cited as prime example of solid financials they are in fact a worthless measure for China. A NPL in China means something completely different than the rest of the world and they even tell you so. For instance, a one bank classifies a loan as “doubtful” if “the operations of the borrower have been suspended for at least half a year.” Let me emphasize that loan is not even considered non-performing, only doubtful. The loan classification standards of Chinese banks are surpassed in their novelty only by Inner Mongolian definition of terrorist videos. Another bank listed a ten-year old bad debt that while not technically on its balance sheet, through a complicated swap arrangement, would be repaid for the bad debt after going public. The loan write offs that have increased recently are only approved by regulators not by the bank implying regulatory coordination over managing the dodgy corporate data.
This behavior is not limited to the banks but true of all companies. Just last month a governmental auditor released a long list of companies and financial fraud from inflating revenue and profit to make performance appear better than reality to companies that reduced official revenue and profit in order to siphon off funds. Large amount of firm data is just as dodgy as official economic data.
There is even evidence that the NBSC is increasing its manipulation of underlying numbers. As in any battle of the wits to the death, a distinct possibility in China, the middling bureaucrat knows knows the Li Keqiang Index and clearly cannot manipulate just GDP anymore. They know that he knows that so clearly they have manipulate electrical data as well. Want evidence? In its second quarter GDP announcement, in the Chinese version of the economic accounts the NBSC declares that energy usage per unit of GDP dropped 6 percent! To put the magnitude of that change into perspective, if that trend were to continue, in about 12 years China would go from one of the least energy efficient countries in the world per unit of GDP to competing with the Danes and the Germans for the most energy efficient countries per unit of GDP. A 6 percent drop in energy usage per unit of GDP for a country of 1.3 billion simply does not happen in one year.A 6 percent drop in energy usage per unit of GDP for a country of 1.3 billion simply does not happen in one year. Data manipulation is in no way limited to headline GDP.
Inside China, it is taken for granted that the statistics are worthless and has been for many years. I was first alerted to questionable data not by academic research, a troublesome foreigner, or a journalist, but by my students. They were in disbelief that a professor would actually believe official Chinese data as everyone already knows the data is manipulated.
The reason I frequently emphasize looking at what China is telling you simple: if you can’t believe the data, actions act as a type of revealed preference. For instance, Beijing may publically announce that everything is fine economically, but RMB 10 trillion of market support says otherwise. Beijing may declare that the data is perfectly acceptable, but they tell others in private they have to construct their own indexes. Banks even go so far as to note that official statistics are unreliable in IPO filings. If you don’t believe me, just look at their actions and their words.
The reason all of this matters is simple: data matters to steer firms and countries away from problems. Look at any country that suffered a financial or economic crisis and one of the fundamental problems will be inaccurate data. Greece fudged its numbers to get into the EU and the 2008 global financial crisis was precipitated by bankers and home owners fudging data. Look at firms that fudge data from Bernie Madoff investments to Enron and quickly the quality of financial data matters. It is important to note that not all countries or firms that beautify their data stumble into a crisis, but most firms or countries that have a crisis have real data problems.
Finally, the data matters because its directly assists in the pricing of assets. Whether it is asset quality of banks or the expected revenue, data manipulation allows countries and firms to hide poor asset quality. Another common thread in financial crises is that that quality of assets is quickly determined to be significantly lower quality than believed by rosy data. Look at the ongoing battle over Noble Group, which is effectively an argument over whether the data is accurate and supports the asset price. Serious questions have been raised about data quality and the pass through effect on asset price. Data and asset quality questions linger at least as important in the debate over the Chinese economy.
There are serious questions throughout China at the macroeconomic level and the firm level on the quality of data and underlying asset quality. What amazes me is that more hedge funds have not started dissecting Chinese non-Mainland listed firms for data issues looking for short opportunities. As a variety of asset prices continue to face downward pressure from Chinese economic activity from commodities to non-tier one real estate markets, attention should be paid to the underlying data in those markets. There are strong indicators that a wide variety of data throughout China is manipulated and that asset prices are subsequently overvalued.
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