Can Investors Trust China's Economic Data?

China's Troubled Economy is Raising Questions among Investors

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China’s economy has struggled to maintain investor confidence in mid-2015, with failed attempts to bolster stock prices and a surprise currency devaluation leading to questions about what the government may be willing to do to maintain a stable economy. While investors may be weary of the country’s official economic data, there are some economic indicators that can still be used to objectively evaluate the its economic condition over the long-term.

In this article, we will take a look at some reasons that investors tend to mistrust China's economic data, indicators that may be trustworthy, and some other important considerations for international investors.

Reasons for Mistrust

Many corporate executives in China and Western economists believe there’s evidence that China has been falsifying economic statistics in order to disguise the true depths of its troubles. For instance, excess coal has been stockpiled due to slower demand for electricity, but local and provincial government officials have forced plant managers not to report the full extent of the slowdown to Beijing, according to power sector executives cited by the New York Times.

A 2007 diplomatic cable – leaked by WikiLeaks – also showed that now-Premier Li Keqiang regarded China’s broad measures of economic growth as “’man-made’ and therefore unreliable”. That said, many mainstream economists believe the country’s broad economic indicators are more “smoothed” than outright “falsified”, with regulators underreporting growth during economic advances and over-reporting growth during economic declines in order to paint a stable economic picture.

Finally, there’s evidence that the central government has access to truthful economic data, while controlling what’s ultimately disseminated to the public and investment community. These dynamics could explain why the government unexpectedly cut interest rates and devalued its currency in mid-2015, which were seen by many as rather extreme measures in the face of official economic statistics, but could be justified if the economy is worse than the official statistics portray.

Indicators to Trust

The good news for international investors is that there are several economic indicators that do provide reliable information about China’s economy. Often times, these indicators are based on production statistics that can’t be falsified or private-sector data points that aren’t under the control of the central government at all. Investors should consider these figures in conjunction with official economic data in order to get a clearer picture of the country’s economy.

Some of the most popular trustworthy economic indicators include:

  • Import/Export DataImport/Export data can be cross-checked with trade figures reported by other countries, which makes it difficult to manipulate.
  • Purchasing Managers Index (PMI) – The PMI is calculated by surveying private and public companies and may be more reliable due to the law of large numbers.
  • Railway Transportation – Rail freight is a useful measure of actual goods moving across the country – a sign of economic activity – that’s not easily manipulated.
  • Electricity Usage – Electricity consumption is a reliable metric of economic growth, since there’s little incentive to manipulate the numbers for fear of restrictions.

Many of these indicators were mentioned by Li Keqiang in the 2007 diplomatic cable that was leaked as the most accurate measures of the Chinese economy.

As a result, international investors may want to give greater weighting to these indicators than others when evaluating the country's economic prospects. However, it's still important to take a balanced look at the economy rather than focusing on any individual economic statistic, since unique dynamics may apply to one and not another.

Key Takeaway Points

  • China’s economy has struggled to maintain investor confidence in mid-2015, with failed attempts to bolster stock prices and a surprise currency devaluation.
  • Many Chinese executives and Western economists believe that China may be manipulating its economic statistics, although perhaps not “falsifying” them.
  • There are many different economic indicators that international investors can trust when gauging the health of China’s economy.
  • International investors should consider these trustworthy indicators along with official statistics before making investment decisions.