Living In A False Data World

WASHINGTON – We are used to hear that we live in a “data driven” world. Thanks to ICT and the computing power explosion, it is possible to gather, streamline and organize millions, in fact billions of bits of information. All this intelligently organized and sifted data provides precious information that will influence, in fact will determine investments, marketing strategies, purchases, and even the pitch of political campaigns.

Reliable data

Fine, all well and good. But this “data revolution” assumes that we do have reliable data; and it also assumes that we have a good sense of “what all this means”, once we have carefully looked at all the available information.

And here I see serious problems. At one level, we may engage in self-deception by giving excessive weight (or not enough weight) to some data. And, on a different level, what if the data is false, or heavily manipulated? In both cases we are in trouble.

Data in context 

Let’s talk about exaggerating the importance of some data. For example, take unemployment. The US Government is proud to tell us that at around 5% the unemployment rate is back to “normal’. True. Except that this unemployment statistic, while correct, is rarely placed in context.

Unemployment is definitely way down, and this is good news. However, the percentage of the US population that is actually working compared to the entire working age population is well below what it used to be 10 or 15 years ago. Indeed, labor participation reached 67.3% in 2000. And now in 2016 it is at down to 63%. Which really means fewer people employed. In other words, the often cited unemployment data omits the fact that millions of Americans simply dropped out of the work force, and therefore are no longer counted. Therefore, if we look at how many Americans are actually working compared to the overall working age population the picture is not so good.

Likewise, when employment statistics are presented, we usually get an aggregate number or percentage. The conventional wisdom is that if unemployment is down this must be good news. This means that the economy is growing, and therefore there is demand for more labor. What can be wrong with this? Well, nothing wrong really.

From a different angle 

However, if we look just a bit under the surface, we see that among the millions of new jobs that have been added in the last few years very few are related to productive activities (manufacturing, mining, energy) that produce new wealth. We have millions who found work in the hospitality industry, or who are on the lower echelons of the health care industry, along with many janitors and landscaping workers. Most of these are low pay, often part-time, marginal jobs.

Therefore, if you focus only on the overall unemployment figures and conclude that all is well, because a healthy labor market is a powerful indicator of a healthy economy, you are engaging in self-deception.

Over valued stock market 

On a different level, a buoyant stock market used to be considered a sign of a healthy economy. But these days it is no longer so. US share prices are dangerously inflated for reasons that have nothing to do with any misinterpretation of the real economy and market forces.

They are inflated because the US Federal Reserve continues to keep real interest rates at historically low levels. This unusual ZIRP policy created a bias against any form of saving. Since they get zero per cent keeping their money in the bank, people seeking some return on their money are induced to invest in the stock market. And since millions started buying stocks for lack of any alternatives, this has inflated stock values.

So, at this time the stock market data is not a helpful indicator of anything regarding the real economy because valuations are grossly inflated. High valuations are disconnected from economic performance. Of course, there have been bubbles before and we can expect more in the future. But this is a gigantic bubble created by the Federal Reserve and its monetary policies. The shares valuations data does not capture any of this.

False data 

And now let’s get to the bigger problem: false data. When the Greek debt crisis emerged back in 2009 it became obvious that the truth about the impending fiscal disaster had not emerged up to that point in part thanks to the complicity of the national statistics agency, (Hellenic Statistical Authority, ELSTAT). At the behest of the Greek government, the agency was happily producing false data, with the obvious intention of hiding the truth about the huge fiscal hole for as long as possible.

More recently, right after Mauricio Macri was elected President of Argentina, one of his first moves was to get new staff in the national statistics agency, (INDEC). His goal is to recreate credibility for economic data published by his new government. It is clear that the previous administration published false (or distorted) data in order to convey the message that the tottering economy was in fact doing well under their stewardship.

Just a few bad apples? 

Well, these are some of the cases we know about. But are these just a few exceptions? Are all other governments around the world complying with high ethical and professional standards when it comes to reporting economic statistics? I would not be so sure. For example, a major country in Africa, beyond inflating GDP growth statistics, cuts the actual number of its very large population in order to show a higher per capita GDP, this way trying to show a sign of economic progress that is not really there.

And then we have impeachment procedures against Dilma Rousseff, the President of Brazil, accused of manipulating public accounts in order to show a healthier fiscal situation. And what about India’s GDP numbers? Most experts argue that they are inflated, even though it is not clear by how much. In other words, India is also under suspicion of “cooking the books” in order to create a brighter economic picture.

China’s GDP numbers 

And, finally, the real monster: China’s GDP growth figures. Nobody believes the official Chinese data anymore. No, China does not grow at almost 7% a year. The question is: how big a lie is this? Is the real GDP growth 6%, or is it 3%? We simply do not know. There are many theories but no hard facts, simply because nobody trusts the official Chinese data.

Now, think about all this for a moment. China is the second largest economy in the world. And yet most experts and analysts routinely argue that the official numbers are fake. But why would China do this? It is quite simple. In China positive economic statistics are necessary tools to strengthen the regime’s political legitimacy. Inflated growth numbers tell everybody a good story: the Communist Party leadership is doing a splendid job.

What about everybody else? 

Once again, are we talking about just a few cases of rogue governments that do not play by the rules? Or is this fraudulent manipulation of sensitive economic data far more extensive?

I would say that the likelihood of data manipulation increases with the degree of authoritarianism. A government not held accountable by any one is not interested in enforcing high standards of truth and transparency. You can bet that it will say whatever it can to make itself look good. As there are not so many accountable democratic governments around the world, we can safely conclude that much of what is published and is then used by analysts as “data” is at least inaccurate, in some instances totally false.

Bad consequences

And data manipulation has really bad consequences. Unless a company enjoys the benefits of political favors, it is hard to make major economic decisions when you literally “do not know what’s going on” in any country that is in the habit of manipulating important economic data. Likewise, it is hard to attract serious foreign investors when you cannot reassure them that the country is ruled according to proper transparency standards.

Data driven world, with many lies 

So, here is the thing. We live in a very strange and paradoxical world. The IT experts tell you that they routinely capture millions of pieces of information on consumers, their preferences, their habits and buying patterns. And all this data drives decisions and investments by large corporations.

At the same time, we see how statistics, even when correct, are routinely manipulated in order to fit a preordained (and often dishonest) narrative. If you want to make the case that the US economy is doing fine, you can point to hard data: 5% unemployment, 2% GDP growth, historically high stock market valuations, low inflation.

But if you want to paint a darker picture, you will point to other hard data. 2% GDP growth is 1/3 below the historic 3% norm. On the basis of other real data, you will say that most of the new jobs are part-time gigs that at best provide survival wages, without creating any chance of upward mobility. You will argue that there are millions of part-time workers who would rather have full-time jobs but cannot get them. And you will also say that, based on hard data, (real corporate earnings for instance), the US stock market is over valued, thanks to Fed policies.

No reliable data without accountable governments 

Once again, regarding the wider world, you can rest assured that every non democratic regime in which leaders are not held accountable –and there many of them– economic numbers are either false or heavily manipulated, so that they can be used by the leaders to support a self-serving political narrative.

Yes, this is a data driven world. And data analysts can indeed perform wonders, provided however that they have real data to work with. And this is not the case. At least not in large parts of the world.

In the end, there is no chance to have true data driven decision-making processes without true democracy, real accountability and transparency.

In the final analysis, good governance is the precondition for getting good data.

China Worries Fostered By Unreliable Government Data

WASHINGTON – What’s going on in the Chinese economy? Nobody knows, really. We get bits and pieces; but not the complete picture. There is a real estate glut in the secondary cities. There has been slow growth. We know that imports and exports are down. We know of massive over capacity in some basic industrial sectors, especially those that support construction and infrastructure (cement, steel and copper).

Ponzi Scheme? 

But we do not know the whole story. There is no open debate on the economy, or policy choices, let alone a clear depiction of the actual state of troubles sectors. In fact, independent reporting on the economy and financial markets is expressly prohibited.

And precisely because nobody knows, when something strange happens, like the recent Shanghai stock market mini crashes, (that now amount to a significant correction), at the very start of the new year, many analysts fear the worst.

The truly scary (still hypothetical) scenario is that China has now become a gigantic “Potemkin Village”, a Ponzi scheme, a make-believe place of fake growth based mostly on unsustainable levels of debt. Just like in other Ponzi schemes, for a while everything looks great, but then it all comes crashing down.

Pessimistic picture

Here is how The Wall Street Journal sees it:

“[It is] more likely that Beijing will continue to prop up growth, steering more capital to money-losing companies, unneeded infrastructure and debt servicing, depriving the economy of productive investment and leading to the sort of protracted malaise seen in Japan in recent decades. But China is less prosperous than Japan.”

“Some state firms remain in business despite massive debt, several years of loss-making operations and a weak business model—Chinese officials have dubbed them “zombie” companies. Earlier this month, during a visit to the northern industrial city of Taiyuan, Mr. Li railed at the drag of “zombie” companies, according to a government account. He said they should be denied loans to reduce excess supply in the steel and coal industries”.

Not a flattering picture. This WSJ piece talks about money-losing state owned companies, costly but unneeded infrastructure, zombie companies, increasing levels of debt, and a lot more. This is nasty stuff. But is this just a crazy exaggeration? Maybe.

Unreliable data 

However, the fact is that the dark scenarios and the extra worry about China are due in large part to an opaque system that produces dubious, and mostly self-serving information. We simply do not have all the facts. Therefore, it is much harder to understand what’s really going on.

And here is at least one key root problem about China. In large part we do not know what’s really going on because we cannot trust official Chinese economic statistics.

It is an almost universally acknowledged fact that Beijing releases only optimistic, doctored economic data. In other words, “they cook the books”. Their data on GDP growth, productivity, unemployment is fake.

Big lies? 

What we do not know is how deep these lies go. Are they doing just a little “air brushing”, some minor embellishments? Or are we talking about massive data fraud? We simply do now know.

And precisely because we do not have a vetted, reliable baseline regarding GDP growth, inflation, unemployment, productivity, manufacturing growth and more, when something really strange and unusual occurs, like the sudden and deep Shanghai Stock Market losses, some are inclined to think the worst.

No transparency 

Well, is China’s government going to become transparent any time soon? Don’t count on it. Don’t count on a privileged Communist Party oligarchy that owes its unchallenged supremacy to its reputation of infallibility to show poor data revealing that the leadership is delivering below plan these days. They will never do this.

Given all this, we are left with a lot of questions. We know that China is slowing down, but we do not know how much. We know that there is a lot of bad debt, but we do not know at what point this becomes truly toxic. We know that most State Owned Enterprises, SOEs, do not perform well. However, we do not know whether this is a manageable problem or a crisis. We know about huge environmental problems caused by past unchecked growth, but we do not know at what point grass-roots protests about severe pollution may morph into organized political opposition.

Not a market economy 

One thing we do know. Despite all the incredible changes, and despite its ability to lift hundreds of millions out of poverty, China has not completed its transition to market economy status.

In a real market economy it is assumed that the government publishes accurate economic data in a timely fashion. It is also assumed that the private sector leads development, while all publicly traded companies publish balance sheets audited by third parties with reputable credentials. Finally, it is assumed that independent media freely report on economic issues.

None of this exists in China. I repeat: “none of this”. 

A Genuine Anti-Corruption Drive In China?

WASHINGTON – The arrest in China of Zhou Yongkang, former head of domestic security and (even in retirement) still a powerful member of the political elites, made news.

No longer untouchable

China’s top Communist Party leaders used to enjoy special status and protection, even after they left office. They used to be untouchable. But now it is different. Under the guise of an all out war against corruption –a war that will target “tigers and flies”, big and small fish– President Xi Jinping has openly incriminated Zhou, one of the most illustrious untouchables.

Recreate trust in the party?

And what is the real end-game here? We are told by commentators that this Beijing-mandated and led anti-graft, anti-corruption drive is aimed at re-establishing trust in the party, although this may be a difficult task.

Difficult indeed. In fact, probably impossible. Anybody can see that there is a credibility problem when a secretive autocracy openly declares war against bad apples within; but uses a secretive process to identify and charge them.

Non transparent methods

The Communist Party is non transparent in most of what it does, beginning with the way in which it recruits, promotes and sometimes demotes its high-ranking officials. Therefore, in the eyes of the average Chinese citizen, it may appear that the Chinese leaders now are pursuing a new agenda that is simply called “fight against corruption”. Still, whatever the label, this campaign may have little to do with creating a new regime of real accountability, transparency and honest practices.

A credible campaign would have to be transparent

I do not have any trouble believing that President Xi may be serious about fighting corruption; simply because a totally corrupt political system eventually becomes both weak and unruly.

However, a real anti-corruption campaign that the common people could believe in would have to be based on clear laws. It would have to be managed in an open and transparent way by independent prosecutors and an independent judiciary, while truly free media would have unfettered access to all records and proceedings.

A way to get rid of enemies?

But we know that none of this exists in China. Right now, we see that many powerful people, both in the government and in the private sector, have been arrested and charged. Some have simply disappeared. Are all these people really engaged in corruption? Probably. But most likely many others are too. So, who gets to pick the targets?

More accurately, is this anti-corruption crusade a convenient way to eliminate potential rivals and/or other power centers that might in any way challenge the authority of President Xi and his allies? Who knows really.

Autocracies cannot be reformed

All this aside, a word of caution. Autocracies cannot be easily reformed or “improved”. As the experience of the old Soviet Union demonstrates, those who try to improve an autocracy –remember Soviet leader Mikhail Gorbachev?– may end up triggering a process that leads to the destruction of the old regime.

China is different, of course. The Chinese Communist Party is not ruling a quasi-failed state. Still, China is entering the uncharted territory of slower economic growth and increasing social tensions.

Unintended consequences

I can understand the public relations goal of trying to make the ruling Communist Party more popular. But I am not so sure that a few high visibility staged trials and a few purges will do the trick.

Meanwhile, a very complex and vast system of patronage, supported by bribes, kickbacks and all sorts of shady relationships may react in unpredictable ways under the new stress created by the zealous Beijing cops.


A Horrible Fire In A Bangladesh Garment Factory Places The Spotlight On Labor Standards In Emerging Markets – The Western Brands Imposed Stringent Rules On Their Suppliers – But What About Compliance?

[the-subtitle ]

By Paolo von Schirach

November 27, 2012

WASHINGTON – Just a few days ago, a horrible fire in a garment factory in Dhaka, Bangladesh caused the death of more than 100 women workers. This tragedy could have been avoided or at least mitigated had their been fire escapes. But there were none and so the poor women could not leave the building on fire. They were trapped inside and died. Walmart immediately issued a statement indicating that it no longer used this factory as a supplier.

The supply chain

This tragedy and the Walmart damage limitation effort placed the spotlight once again on the rather difficult and opaque issue of the supply chains that provide the garments that eventually are bought by Western customers in inexpensive department stores such as Walmart.

Indeed the poor women workers in Bangladesh in a sense are the key factor that allows Walmart to charge very low prices for its jeans and T shirts. Yes, it all starts with cheap labor provided by illiterate workers who are paid almost nothing for their efforts. Like it or not, this is the sad face of globalization. It is relatively easy and inexpensive to source labor intensive goods in low wage countries like Bangladesh.

Let’s make it clear that Walmart, Polo, Benetton or Calvin Klein usually do not own any garment factories in Bangladesh, Vietnam, Cambodia or Nicaragua. They source from these factories and/or from intermediaries who in turn place orders with the factories. Therefore, technically speaking, the Western brands and/or major retailers bear no direct responsibility for the (usually inadequate, sometimes appalling) working conditions in these modern sweat shops.

Moral responsibility

But they do bear moral responsibility. Because of media campaigns fed by NGOs, Western consumers are becoming aware of the long supply chains that originate in poor countries. People are beginning to realize that what they buy in Chicago or Frankfurt has been made by poor, underpaid and usually exploited women in Bangladesh or India. And, yes, at last some Western consumers do care about lack of living wages, unpaid over time and bad workplace conditions in far away countries.

Labor standards

For these reasons the big Western brands and major retailers decided a few years ago that it was in their business interest to be seen as proactive on labor conditions in the countries where they source their garments. And so they started pushing their suppliers to improve work place conditions and wages for their workers.

Whether they really meant it or not, it is good PR to be seen on the side of the struggling workers as opposed to be viewed as complicit with the exploitative sweat shops owners.

Over time, because of media attention fueled by a variety of NGOs that forced the brands to act there have been improvements regarding work place conditions in factories located in emerging markets that supply the Western brands.

In many cases, the factory owners have to abide by certain work place and labor standards in order to qualify and retain their qualification as suppliers. The brands conduct routine inspections to verify compliance. Sometimes specialized NGOs participate in the monitoring process, in order to verify real compliance.

Improved conditions?

The end result should be improved working conditions for those low wage emerging markets workers (mostly women) who make it possible for us Western shoppers to buy really inexpensive socks or underwear.

But obviously the system is not really working as it should. The fire in the Dhaka factory is evidence of non compliance with elementary safety rules. And we can rest assured that, beyond glaring issues such as lack of fire escapes, most of these factories have inadequate ventilation or sanitation facilities. We can bet that women workers are routinely intimidated, threatened, fired or worse just for asking bathroom breaks. We can bet that many of them have to survive on ridiculously low wages, while they are not fully paid for their overtime.

Hidden cost of low prices

There is no doubt that the efforts promoted by NGOs and other activists helped a lot. If nothing else the Western brands felt compelled to demand compliance with new, decent standards and to issue yearly reports on working conditions in the factories operated by their main suppliers. That said, this Bangladesh avoidable tragedy shows that we are still far from a world in which all workers are treated fairly. Sadly, this is the hidden cost of your low priced jeans.

The Obama Administration Failed To Protect The US Consulate In Benghazi From Credible Terror Threats – After The Killing Of Ambassador Stevens It Created The “Video” Story To Obfuscate The Facts And Deny Its Responsibilities – Failure To Pursue Intelligence Leads, Inadequate Security And Lack of Candor, A Bad Mix

[the-subtitle ]

By Paolo von Schirach

Related stories:

September 27, 2012

WASHINGTON – The story of the (probably) preventable attack on the US Consulate in Benghazi (Libya) is slowly evolving into what may turn into a major scandal, feauturing: bad intelligence, inadequate security, the killing of a serving US Ambassador (first instance in 30 years) and a subsequent deliberate obfuscation aimed at confusing the public and hiding administration responsibilities. In two earlier pieces on September 17 and 21 (see links above) I pointed out that the official “its-all-about-the-video-we-had-no-clue-anything- like-this-may-be-happening” explanation did not add up.

Intelligence failure, and more

The Libyan government had already publicly stated that the attack against the Consulate in Benghazi was premeditated. This was not a spontaneous outburst that had unfortunately turned violent. The US Consulate had been targeted. Well armed militants had a mission to attack and kill. I stated at the time that, assuming what the Libyans had said was true, then as a minimum here we would have a major intelligence failure.

But now that some of the facts are coming out, it looks a lot worse. In a detailed editorial, The Wall Street Journal (The Libya Debacle, September 27, 2012) recounts that American officials in Libya had reported concerns about imminent attacks back in the spring. That notwithsatnding, the US diplomatic facilities had only minimal security protection. Ambassador to Libya Chris Stevens himself had apparently noted that he was a possible target of extremists.

Given all this, (and surely there is more to come), it is incomprehensible that the US Consulate was only lightly protected on September 11, the anniversary of al Qaeda’s major terror action against the USA.

Bad planning, inadequate security and then obfuscation

If it is all as it unfortunately appears, then this is much worse than what I thought at the beginning. This was not just intelligence failure. This was lack of action after having received credible intelligence that something might happen. If this is indeed so, I would call this negligence.

And it gets even worse because of the deliberate, if clumsy, administration obfuscation attempt to blame the anti-Islam video for everything, when apparently they knew that this was a planned attack practically from day one.

So, there you have it. Bad planning, actionable intelligence not acted upon. As a result, inadequate security in Benghazi. All this was followed by a disaster and by the immediate attempt by the administration to divert attention and deny responsibility.

Administration looks bad

In all this, President Obama looks bad. Secretary of State Clinton looks awful, since the State Department is in charge of Diplomatic Security and therefore responsible for the personal security of all its staff. And UN Ambassador Susan Rice, dispatched to tell the “video” fable on all the TV networks, is made to look like a fool, since her superiors knew exactly what had happened, while they instructed her to make up a story aimed at exonerating the administration.

No pass for George W. Bush

What is most astonishing in this disaster is that hardly anybody is talking about it, except for the major media openly opposing Obama, like Fox News and the WSJ (same Rupert Murdoch ownership). Imagine if unloved George W. Bush just a few weeks before a crucial election had tried to get away with something as egregious as poor planning and poor security measures resulting in the first killing of a serving US Ambassador in 30 years. Would the media have given Bush a pass?

The Fukushima Nuclear Disaster Is Not The Result Of The Tsunami, A Report Claims

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By Paolo von Schirach

July 6, 2012

WASHINGTON – Well, it would appear that it was not just the unprecedented combination of a major earthquake and a gigantic tsunami that caused the Fukushima nuclear plant failure in Japan, with consequent explosions and release of radioactivity in the atmosphere. A group of experts asserted that a a dominant and unchallenged culture of cozy relationships between industry and government leading to relaxed regulations and thus poor safeguards at Fukushima is the primary culprit.

The Fukushima nuclear disaster is about bad system upheld because of a culture of conformity

The Diet Nuclear Accident Independent Investigation Committee chaired by Kiyoshi Kurokawa candidly stated that the lack of adequate safeguards at Fukushima was really due to: “our reflexive obedience; our reluctance to question authority; our devotion to ‘sticking with program’; our groupism; and our insularity”. This was “a made in Japan” disaster because of a shared and unchallenged attitude encouraging all players to hide problems and minimize issues. In Japan the guiding principle is not to do the right thing; but to do whatever pleases authorities. Above all avoid embarrassment.

The report’s gloomy conclusion is that this unprecedented disaster is not about a set of individuals in charge who made fateful mistakes. No, the problem is systemic. “Had other Japanese been in the shoes of those who bear responsibility for this accident, the result [might] well have been the same”.

While the report makes also other considerations about the way controls and accountability have been set up and managed, this strong and candid indictment is interesting precisely because it is so non-Japanese to air such sweeping self-criticism in the open.

Will this report trigger a debate?

This powerful indictment, assuming its accuracy, should invite the opening of a national conversation in Japan on the limits and indeed liabilities created by a culture that reflexively imposes uniformity and strict compliance with authority, at the same time punishing or at least discouraging dissent.

In practice the report says that had anybody come out denouncing the inadequacy of safeguards and safety procedures at Fukushina prior to the disaster he would have been immediately eliminated and quickly forgotten about. No whistle blowers in Japan.

If this is indeed how most organizations are managed in Japan, then the Japanese people only hope is to be blessed with excellent managers, because the system is impervious to analysis, scrutiny and corrections.

Defenders of the system will fight change

While a deeper reflection on what this report asserts should be welcome, I am quite skeptical about how far this self-scrutiny –assuming that it even started– can actually go. It is easy to explain this whole matter away. The defenders of the status quo will claim that Fukushima is an unprecedented disaster which occurred in the wake of a historic natural catastrophe. Easy enough to convince the general public that whatever happened there was due to specific circumstances and that generalizations would be most unwise.

Forget about cultural renewal

And therefore we may as well forget about the beginning of a cultural transformation that would result in a more open Japanese society; a society in which a Western-style spirit of inquiry coupled with a healthy principle of personal accountability would supersede the established tenets of subservience to authority, group think and the entrenched principle whereby lies and misrepresentations are alright –in fact noble– in the pursuit of the worthy cause of saving the reputation of the organization one belongs to.

Japan is an old and sclerotic society. Holding on to cherished principles that force conformity and the preservation of relationships, even when these work against the public good, is not going to help modernization and rejuvenation.

China Is Slowing Down, But How Fast? – No Way Of Knowing Because Statistics Are Notoriously Unreliable – Analysts Developed Their Own Metrics

[the-subtitle ]

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.