Sunday, July 8, 2012

Getting China Right

Readers of this blog know that I've spent a lot of time trying to spread the "truth" about the Chinese economy because it weighs so heavily on not only the US and global economies but also our political discourse here in the states.  In short, if American politicians and pundits are going to justify their calls for protectionism or state-led industrial policy on a threatening or impressive Chinese economic juggernaut, it's important that we try to separate the silly rhetoric from the economic reality in order to thwart such policies.  As most China-watchers know, however, such analysis is extremely difficult because of the dearth of quality information about what's really going on in the Middle Kingdom.  Sure, the Chinese government issues periodic reports on all sorts of economic indicators (and then banks and other analysts issue their analyses based on these data), but - let's face it - it's extremely unwise to put too much stock in any of this because of Beijing's difficulties with collecting data and its long history of, ahem, creative math and accounting.  My favorite example of such reporting is the official data on non-performing loans in China:
Latest data from China's Banking Regulatory Commission showed that the non-performing loan (NPL) ratio for the country's commercial banks stood at 0.9 percent as of the end of the first quarter, down from 1 percent at the end of last year.
Considering that the Chinese government directs much of its economic stimulus through such banks and that the Chinese banking sector has long been a target for reform, an NPL ratio under one percent is truly a Festivus miracle... or it's completely wrong.  Indeed, independent analysts think the real ratio could be more like 30% or higher (for a good read of why the official number is rife with problems, I recommend thisFT piece from 2011), but, really, it's anyone's guess.

And, of course, it's not just NPLs that are a problem - it's pretty much every major economic indicator in China, each obfuscating the Chinese economic picture and making it exceedingly impossible for anyone to accurately gauge or predict what's going on over there (and thus how we'll be affected or how our government(s) should react).

This all might be changing, however, with the impending release of a massive, independent report on the Chinese economy called the China Beige Book - the largest ever national and regional survey of the Chinese economy using independent data.  Bloomberg explains the report's methodology, which entails interviews of about 2,000 company executives and bankers and is  modeled after the US Federal Reserve's Beige Book:

The survey uses methodology adapted from the Fed’s Beige Book survey, according to CBB. The central bank is not involved in the China survey, CBB said. The U.S. Beige Book is published eight times a year, or two weeks before each meeting of Fed policy makers, giving anecdotal data to inform interest-rate decisions.

CBB provided Bloomberg with a full copy of the inaugural first-quarter report running 58 pages. It contains chapters on each region with anecdotes from companies it didn’t identify.

Examples included a toilet maker countering labor shortages by moving to northern Guangdong province and hiring local workers at higher wages instead of migrants from inland provinces. The president of a food-store chain said banks were very strict in examining and verifying loans, according to the report.
The CBB isn't out yet, but its publishers (CBB International) have been kind enough to give me one of the few embargoed copies of the report's summary memo for 2Q 2012, and I must say that it's a fascinating read of what they call "on-the-ground sentiment" which isn't reflected in the official government data (or, at least, won't be for several months).  The express purpose of the CBB is to use qualitative and quantitative data to track bank and business activity as it changes from quarter to quarter across China's regions, industries and key sub-sectors.  In short, it's a real-time measurement of what's actually happening on the ground right now - not what the Chinese government insists is happening or what was happening a few months ago.  And these guys do it on a quarterly basis.


The surprising bottom line from the new 2Q 2012 report, as the Bloomberg article notes: the CBB is finding strengthening economic activity in China just as most analysts are debating whether the country will have a soft or hard landing over the next few months.  Among some of the CBB memo's juiciest tidbits (that I'm allowed to share):
  • Retailing shows no sign of a slowdown from the first quarter – it picked up to become the fastest-growing sector and retailers expect spending to strengthen further."
  • "Investment by business is ticking up slightly..."
  • "Manufacturing is picking up...."
  • "Bankers say interest rates on loans are declining somewhat...."
  • "Real estate is on an upswing, according to property agents, who are much more positive on industry conditions than last quarter."
  • "Unskilled labor shortages continue unabated.... In response, [ ]% of firms are raising wages this quarter."
I freely admit that I found almost all of these conclusions pretty startling - they're very, very different from what I've been reading in the mainstream press over the last few weeks.  According to the CBB's publishers, this is because the current data lag by several months and are reflecting a "panicked" late-2011 rather than a sturdier 2Q 2012.  That makes sense to me, although I'm still surprised that, if CBB is right, China's "hard landing" has already come and gone.

This is only the CBB's second iteration, so it's too soon for us (or even them, as the publishers freely admit) to confidently say whether the CBB data can really predict - or correct - the official economic stats from the Chinese government.  But if CBB turns out to be right, their reports will be truly fantastic addition to the current - and laughably deficient - market for good China economic analysis.

You can check out the CBB for yourself here at their website.  More to come, I'm sure.

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