By Paolo von Schirach
June 23, 2012
WASHINGTON – We know that China is experiencing an economic slowdown. Everything being relative, their “slow down” to a still stupendous 7.5% rate of growth, or so, (official forecast) would be the envy of most countries. In contrast, poor USA is limping along at 2%. Some battered European countries are in recession, others are growing at a mere 1%).
How significant is China’s slow down?
But the very idea that mighty China may be trending down causes all sorts of concerns. China is the main client for commodity producers around the world. For years, the Chinese have been buying copper, coal, iron ore, soy beans, oil in gigantic quantities. The economies of Chile, Brazil and Australia, to name a few, move in large part in sync with demand from China.
Given these deep interdependencies, what if China’s troubles are deeper than we think? What if China is really slowing down to a more normal 5% rate of growth a year, something that would be in line with the performance of many other developing countries? Such a change could have significant repercussions, ranging from political stability within China, to economic growth in many countries that have become its key suppliers.
Cooking the books is an art form
That said, while economic forecasting is a difficult business anywhere, the added complication in China is that the statistics, as a high ranking Chinese official nicely put it (off the record) a while ago “are man made“. That was a polite way to say that they “cook the books“. The numbers are creatively rearranged to fit a previously scripted narrative.
Separate sets of books
The International Herald Tribune in a recent story explains very well how this is done: “Indeed, officials in some cities and provinces are also overstating economic output, corporate revenue, corporate profits and tax receipts, the corporate executives and economists [interviewed] said. The officials do so by urging businesses to keep separate sets of books, showing improving business results and tax payments that do not exist“.
The IHT goes on to say that the creative book keeping and consequently the false statistics extracted from them may inflate key economic indicators such as GDP growth by 1 or even 2 %. If this were true, that’s really a lot. Going back to the official growth target of 7.5%, what if China’s real growth rate were instead 5.5%?
Unofficial metrics: coal consumption
That said, how do analysts try and glean the truth? Very difficult indeed. One metric considered by most practitioners as the most reliable is coal consumption. Most of China runs on coal. Coal is used for 85% of electrical power generation. China’s industries are huge customers. When coal piles up in key storage areas, this is a tell tale indicator of industrial slowdown. The bigger the coal mountains, and the longer they stay, the worse the news.
But how is it possible to make accurate predictions on China’s growth just by making extrapolations on the basis of the height of coal mountains in storage places? Besides, the electric utilities apparently do what everybody else is doing: they cloud the picture by declaring false numbers regarding coal used and amount of power generated and consumed.
We still do not know for sure
Bottom line, while we have some sense that China is slowing down, we have no way of determining if this is minor or possibly major. We have no way of knowing if structural issues are involved or only temporary contingencies, such as the recession in some European countries that shrunk demand and thus imports from China.
In a year of political changes, expect good news from officials
In all this uncertainty, we can be sure of one thing. This year China will undergo a major political transition. So, this would hardly be the time for statisticians to broadcast bad news. Count instead on officials doing their best to make the economic numbers look reassuringly good. The growing mountains of coal, of course, would tell a different story. But we do not know –nor do we have a way to know for sure– how bad a story.