Don't Trust China's Economic Reports

Junheng Li delivers the warning at Bloomberg Opinion:

China as a whole is a giant black box -- no one really knows what is in it. Chinese bureaucrats don’t have any interest in reporting anything that doesn’t paint a good picture, and, even if they did, the statistics bureau remains woefully inadequate.

At the same time, gross domestic product forecasts issued by major investment banks areequally unreliable. Just as with equity research analysts and stockbrokers who package IPOs and sell them to investors, major banks’ economists try to curry favor with Chinese bureaucrats. As such their forecasts are essentially a point-for-point rehash of what fiscal and monetary policies the bureaucrats say are coming down the pipe. The information is repackaged and sold as euphoria to support banks’ profit-generating activities, such as IPOs and securities trading.

So far, these forecasts have worked relatively well, as one would imagine. China’s hybrid economy depends more heavily on government policy than most, and can count on the cushion of intervention from on high.

Once a growth target is set by the top, the central government then allocates GDP growth from the top down. The state gives provinces a target, each province mandates to the regions, regions to departments, and departments to corporations, including state-owned enterprises and private companies. Despite the admirable economic growth that China has delivered, at its core the reward and punishment system hasn’t changed in stride. Those who comply are rewarded and those who raise uncomfortable subjects are punished; a cut in pay or acork in one’s career advancement are to be expected if one can’t provide the euphoria package.

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David Frum

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