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Fishy Economic Data and the China Crash

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Wolf Richter   www.testosteronepit.com

An unrelenting, horrid wave of scandals about toxic ingredients in foods and medicines in China shows that regulators are unwilling and incapable of controlling it. It also shows a penchant—some evil tongues say it’s cultural—for pandemic cheating in order to get ahead in some way. And Chinese economic data falls into that category.

Every country has its own bureaucratic madness in pursuing obfuscation. In the US, one of the hardest things to get is a truthful, or at least a somewhat realistic, or at the very least a not totally fabricated unemployment and jobs number. But at least, the Bureau of Labor Statistics issues a slew of supplemental data. So, in addition to the nearly worthless headline numbers that media and politicians wave in proclaiming victory, we get numbers that point at deeper fissures [for a fun head-butting on this issue, read Yves Smith’s post].

But in China, the art of data manipulation is such that even the government might not know the true status of the economy. Officials even at the local level are rewarded, promoted, or demoted, based on achieving their economic quotas as measured by tax receipts, business revenues, real estate developments, and so on. Hence, the incentive to fudge the numbers on an individual basis is high. According to the New York Times, “The officials do so by urging businesses to keep separate sets of books, showing improving business results and tax payments that do not exist.”

As the fudged numbers flow upward and are consolidated, they aggregate into a fudged whole, inflating GDP by 1 to 2 percentage points. But it might be a lot worse, and sometimes it’s just the way it’s counted.

Auto sales, for example. A crucial economic data set. But the way they’re reported, even if they were accurate, make them useless for estimating the health of the auto industry or the consumer. In May, they jumped 23%, higher than analysts had expected. The media drooled. Toyota and Honda nearly doubled their sales. Ford pushed 23% more units out, GM 21%. BMW sales soared 32%. Everything was simply outstanding.

Alas, they’re wholesales to distributors, not to consumers. In the US, auto sales are based on sales by dealers to retail and commercial customers. In Europe, they’re based on new vehicle registrations—when customers get the tags. This is even more accurate than dealer sales; just before cutoff, dealers scramble to push every possible unit into the system to beat the other dealers in town, and in the process, a few half-baked units slip through; later, when the down-payment check bounces or whatever, the sale will have to be backed out, showing up as a negative sale the next month. So the fudged numbers are small and self-correcting.

But in China, auto sales are reported as wholesales—when vehicles leave the plant. And while these numbers were stunning and glorious, at dealerships the scenario was gruesome: sales in May couldn’t digest the flood of production. Inventories on lots across the country ballooned from 45 days’ supply at the end of April to 60 days’ supply by the end of May—a dizzying 33% increase in just 30 days. And the ballyhooed 23% increase remained unsold. Added to inventory. Channel stuffing. Rampant overproduction and weak retail sales [for that whole debacle, read... China: A Mixed Bag Turns Very Ugly].

So, to feel their way through the inaccurate data fog, many foreign observers, and also Chinese officials, have been trying to find alternative measures that are less prone to cheating and manipulation. And electricity generation has been seen as a reliable, no BS indicator of what’s really happening in the economy. Such basic industrial data is hard to manipulate.

Not for the Chinese. Turns out, stockpiles of coal, the main fuel for Chinese power plants, has reached record levels as demand from power plants, which should have been increasing in a growing economy, has plummeted as a function of plummeting demand for electricity. And now, according the New York Times, even the government is investigating the signs that reported electricity output was exaggerated.

When the economy is hot, there is less incentive to cheat, but when it’s slowing down, though the quotas don’t allow for it to slow down, cheating becomes a career imperative. And “Government officials don’t want to see the negative,” said a chief executive. So these officials pressure the industry to wipe away any decline in consumption by reporting it as flat.

In Shandong and Jiangsu, where heavy industry plays a big role, electricity consumption has plunged more than 10% in May compared to prior year. Similar trends have been observed in Western China. While official data has been showing a slowdown of the Chinese economy from its torrid pace to a growth rate that would still be stunning in the US, electricity consumption suggests that the slowdown is much steeper. Anecdotal evidence to that effect has been popping for a while—to be negated by decent official numbers. And one wonders how long this charade, even in China, can be kept up before reality sullies it.

China has been the biggest winner of globalization. But populist and nationalist movements sweeping the world are threatening China and are a visceral rejection of China as the world’s biggest exporter. Read.... Death Of Globalization Will Shatter China.

36,000 Chinese engineers, tradesmen, and technicians fled Libya when NATO began bombing. Though China opposed the NATO intervention, it’s back in good graces with the rebels. But China wants much more than Libya’s crude. It sees the country as the springboard to a bigger prize—control of Africa’s massive oil reserves. Part of its “grand plan” to buy up energy resources, writes Marin Katusa. And now two superpowers with conflicting interests are battling it out on the world stage again. Only this time, it’s not about ideologies. It’s about survival. Read.... The New Cold War.

 


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Tue, 06/26/2012 - 04:16 | Link to Comment BigE
BigE's picture

World Economics produced a China Growth Monitor that covered a wide variety of indicators in an attempt to measure growth (positive or negative), I'd be interested if you think it's on the right track to being useful.

http://www.worldeconomics.com/Papers/China%20Growth%20Monitor_cac90741-8882-4311-969e-3ae0e3e2575c.paper

Tue, 10/30/2012 - 14:11 | Link to Comment smartmil
smartmil's picture

Usually, neti pot amoeba is not a big problem if it is present in tap water and you drink it. The problem might occur when it somehow manages to get up into your nostrils. This quite rare infection typically occurs when people swim or dive in warm freshwater rivers and lakes.

Mon, 06/25/2012 - 11:11 | Link to Comment Tum
Tum's picture

Glenn Beck used information from this article today, but failed to mention either sites. Perhaps it's just a big coincidence...

 

At least he's using Zerohedge as show prep. A mention of it would be nice.

Mon, 06/25/2012 - 06:19 | Link to Comment silverdragon
silverdragon's picture

Everyone is writing articles about China and most have absolutely no idea what they are writing about. Do what you have to do to make a buck but why not go to China, travel a bit maybe 20-30 cities, talk with locals and foreigners from an assortment of nationalities. Talk with people that are in charge of stuff get a broader cross section of decision makers telling you what is actually going on.

This article is just cut and paste crap.

Guess the intention wasn't to inform, just to mislead.

Mon, 06/25/2012 - 09:57 | Link to Comment covert
covert's picture

fudging is usually a mistake.

http://covert.ias3.com/expose/

Mon, 06/25/2012 - 06:25 | Link to Comment rufusbird
rufusbird's picture

You took the words right out of my mouth. (the part about going to China) Anyone with any money should go there. It does not cost that much for a ten day tour. You can book them with a local travel agency and see it for yourself. I highly reccomend it, as it was one of the most impressive experiences n my lifetime.

 

Mon, 06/25/2012 - 10:43 | Link to Comment RoadKill
RoadKill's picture

I disagree 100%. Ive been to China a dozen times, and not just Beijing and Shanghai. Harbin, Cheng Du, Dong Feng, Shen Zen etc...

Its an absolute hell hole. The pollution is so bad you will mever see the sun. In some cities its so bad you cant see a block in front of you. It hurts to breathe - like smoking a pack a day.

Everything is built like crap. The food is horrible.

The only place ive been thst was worse was Delhi in the summer. But other parts of India were fine. No where in China is nice. Except Hong Kong.

Mon, 06/25/2012 - 04:18 | Link to Comment silverdragon
silverdragon's picture

The Chinese aren't really interested in the whole rule the world thing.

For them its about the bucks.

Their engineers are invading the world building stuff, planting stuff and digging stuff outta the ground.

Unlike another country which has a military base in most countries and keeps invading other countries.  Not pointing fingers, just saying.

 

 

Mon, 06/25/2012 - 05:12 | Link to Comment world_debt_slave
world_debt_slave's picture

the Chinese have been around for quite some time. Don't discount their patience in conquering their enemies. Read Sun Tzu "The Art of War".

Mon, 06/25/2012 - 03:26 | Link to Comment Peter Pan
Peter Pan's picture

Come on everybody. We have been told that when things are serious we have to lie. If lots of lies are told, then we know that things are REALLY serious. How's that for a barometer of economic health?

Mon, 06/25/2012 - 02:49 | Link to Comment ebworthen
ebworthen's picture

China is engaged in a quest for global power.

They are building their army, navy, air force.

They are crippling the ability of the U.S. and the West to manufacture steel, electronics, armaments, and even the most basic items such as a can opener.

When they are ready to take control they will only have to stop supplying manufacturing and the West will be on it's knees within a year.

We have already lost the war.

Mon, 06/25/2012 - 02:25 | Link to Comment chump666
chump666's picture

Oversold markets should get slight relief bounce...slight, then:

-- Global growth fears hitting commodity and emerging markets
-- Fears will intensify if EU leaders fail at summit next week
-- Need for long-term debt solution to prevent more sell off

China melts down and drags Germany with it, takes out Europe.  The Fed revs up the print job till doomsday

Mon, 06/25/2012 - 10:51 | Link to Comment RoadKill
RoadKill's picture

How can you fail when no one has any idea what would constitute success?

No idea where you guys get your cntl-P scenario. The Fed has shown its far more hawkish in terms of controling inflation vs printing to goose UE. Same with the Germans. Its the FPIIGS that have the history of printing.

Seriously, we all know things are going to end VERY badly, but no one knows if its 1929 or 1970. So the 10% of us that are smart enough to know something bad is going to hapoen - half of us will still get wiped ouy because they bet on Weimar instead of Japan.

Mon, 06/25/2012 - 00:41 | Link to Comment laomei
laomei's picture

Keep writing about things you don't understand... it's pretty funny.

Mon, 06/25/2012 - 00:26 | Link to Comment silverdragon
silverdragon's picture

Wake the f*ck up people, don't let your racism effect your decision making, especially when it comes to making money decisions.

We all agree China govt stats will be manipulated up as promotions depend on it.However all private companies will massively under declare revenue as some industries have tax on turnover as well profit.

Govt stats probably off by 1-10%. Private company data off by 10-90% depending on the industry.

Bottom line there is a shit load of undeclared GDP in the private sector.

I suggest if people need to feel better about themselves and feel happy that China may be slowing then no problem. However if you are a decision maker and your companies future is tied to China probably best to attempt to understand how big the black economy is in China, how much undeclared GDP exists in the Sole Proprietorships and China LLC's.

Mon, 06/25/2012 - 00:23 | Link to Comment Mark Noonan
Mark Noonan's picture

I've been astounded for years that anyone ever lent any credence to Chinese statistics - most Chinese still live in grinding poverty, a huge portion of their population works at just barely producing enough food to get by and we're supposed to believe that China is the trailblazer for the future?  That a whole bunch of un-elected, irresponsible grandsons and grand daughters of a privileged elite know what the heck they are doing? 

Here's what China is doing - heading for demographic catastrophe.  Thousands of years of trials and tribulations could not kill China but a mere 70 years of, first, the worst aspects of communism and then the worst aspect of capitalism have killed China.  They are doomed, finished, kaput - no future; they are having no children and don't want them...

Am I the only person who has noticed that the cheap crap the Chinese produce becomes, year by year, crappier than it was before?  Am I the only person who understands that if the District Party Boss doesn't want to get shot he'd better paint the rosiest picture possible?  Am I the only person left in the West who knows that, culturally, no one in Asia ever wants to be the first to bear the bad news? 

Just get ready for the crash - it will be defeaning.

Mon, 06/25/2012 - 10:33 | Link to Comment Leknam
Leknam's picture

Makes sense to me . Central planning does not usually work , at best it eventually sorts itself out by luck more than design . Being brought up in England 1 example i can give is  first their was the coal mines and then we saw house's spring up... etc etc You can not argue with nature and time . Demand comes first , second and third .

 

Mon, 06/25/2012 - 02:37 | Link to Comment Cast Iron Skillet
Cast Iron Skillet's picture

yep, you're the only one. ... ummm ... what was the article about again?

Mon, 06/25/2012 - 01:43 | Link to Comment TruthInSunshine
TruthInSunshine's picture

Yep. And a great article by Wolf Richter, yet again.

Aside from the massively distorted economic data sets coming out of China (China's central planners essentially incentivize provincial politicians and technocrats to show robust data on everything from consumption to job creation to regional bank lending-capitalization-defaults on loans, and then self-report the numbers back to Beijing, so it shouldn't be any surprise the numbers are deeply suspect), the massive problem China has now is figuring out how to create enough new jobs (they need about 900,000 jobs created each month to keep up with new entrants to the labor pool, based on their demographics).

This problem is only going to get worse for the Chinese Central Planners.

This is what foments social uprisings. It's not an exaggeration at all to say that the only manner by which China's leaders can stave off what may be a jade revolution in the making will be the measure of brutality they're willing to unleash on their citizenry.

 

Sun, 06/24/2012 - 23:56 | Link to Comment world_debt_slave
world_debt_slave's picture

William F Buckley Jr Firing Line Oil interview

http://www.youtube.com/watch?v=jSZNbUxgK7Q

Sun, 06/24/2012 - 22:59 | Link to Comment tony bonn
tony bonn's picture

"...Alas, they’re wholesales to distributors, not to consumers. In the US, auto sales are based on sales by dealers to retail and commercial customers....."

and that's the way all of chinese gdp is computed - it's a function of production rather than consumption - the inverse of the way it is counted in the usa...

of course it's an outlandish sin that these numbers are tabulated - they are grist for central planners and their totalitarian ways....

Sun, 06/24/2012 - 21:58 | Link to Comment jonjon831983
jonjon831983's picture

A month or so ago I saw an article about Chinese companies cancelling commodity contracts.  I showed it to my friend in HK and it was confirmed hearing more of these going on.

Also, remember how COSCO the Chinease sea shipper cancelled contracts as well.  (albiet, they were made during the peak circa 2008)

 

Pulled quick search:

"Chinese Purchasers Default on Commodity Contracts"

http://www.forbes.com/sites/gordonchang/2012/06/03/chinese-purchasers-default-on-commodity-contracts/

Sun, 06/24/2012 - 21:05 | Link to Comment reader2010
reader2010's picture

According to our lord, China is the future and they have moved their operations there too. Your bad-mouthing  China can land you in one of those free FEMA camps near you. 

Sun, 06/24/2012 - 22:00 | Link to Comment jonjon831983
jonjon831983's picture

Sorta - I have been thinking IF this China bubble pops, a lot of people around the world are going to be... unhappy.

Anecdotally, over the last few years it seems a lot of people have been saying China is the future everybody go learn everything Chinese and teach your kids Mandarin.

IF everything collapses, I wonder how everybody will feel.

Mon, 06/25/2012 - 06:03 | Link to Comment ebear
ebear's picture

>>Anecdotally, over the last few years it seems a lot of people have been saying China is the future everybody go learn everything Chinese and teach your kids Mandarin.<<

They said the same thing about Japan in the 80's.

Trees don't grow to the sky.

Mon, 06/25/2012 - 02:34 | Link to Comment Cast Iron Skillet
Cast Iron Skillet's picture

you likey fried wice?

Sun, 06/24/2012 - 21:20 | Link to Comment Dr. Sandi
Dr. Sandi's picture

I'm gonna do my damndest to see if I can become a counselor if I end up at one of those camps.

Mon, 06/25/2012 - 07:55 | Link to Comment shovelhead
shovelhead's picture

Can we make pot holders? I like making pot holders and S'mores.

Sun, 06/24/2012 - 20:42 | Link to Comment rsnoble
rsnoble's picture

When I was ten my japanese stepfather Hiro and I went to godfather's pizza. We drove in back afterwards and went by a chinese restaurant and a couple of them were out back and he stopped and did a burnout in a '69 camaro and then screamed at them 'you likey fried wice?" I lmfao as he got out of the car and threatened to beat there asses, and im sure he could had, and then told me that the chinese were the biggest pieces of shit, liars etc etc etc on the planet.

Not really trying to drive a point across, except that I don't think the Japs like them. LOL.

Sun, 06/24/2012 - 23:45 | Link to Comment JohnG
JohnG's picture

You have been too. :)

Sun, 06/24/2012 - 22:05 | Link to Comment DoChenRollingBearing
DoChenRollingBearing's picture

I admit it, smile cracked.  LOL...

Sun, 06/24/2012 - 20:42 | Link to Comment mendolover
mendolover's picture

Didn't Dim Jim Cramer just say the other day that oil couldn't go below $80?

Sun, 06/24/2012 - 20:31 | Link to Comment q99x2
q99x2's picture

The butterfly flapped its wings. That's ok a lot of stolen money is helping the US real estate market. Or so I hear. I don't believe that either.

Wonder if anyone is going to post any videos of Soetoro's mom and dad this week.

I joined the Republican party. Those democrats are weird. Think Clintons.

Sun, 06/24/2012 - 21:28 | Link to Comment mvsjcl
mvsjcl's picture

WTF are you blabbing about!!!!???? Republican? Democrat? This is Fight Club. We don't "join" no stinking party. We GO to parties!

Sun, 06/24/2012 - 20:41 | Link to Comment mendolover
mendolover's picture

Good to hear you're thinking.  You will find out before long that the two aren't really that different.  They are run by the same master(s).

Sun, 06/24/2012 - 20:38 | Link to Comment Bear
Bear's picture

Wow ... and I thought Bill was the last sane one left ... but I guess I was wrong

Sun, 06/24/2012 - 20:10 | Link to Comment kedi
kedi's picture

What a surprise. Nobody remembered decades of western governments, press and economists laughing and jeering at communist and socialist government statistics?  The always more than successful 5 year plans. Of course those same westerners drooled at the thought of controlling the truth in the same ways. They are now well on the way to being as ludicrous as the old commies were. Nobody minded stepping into that framework of false facts. Perfect for the top to bottom scams of every type. Escape the few shreds of regulation and reality, offshore it to fantasy land along with everything else.

Fools believe the statistics. Cons use the statistics. The sheep still do not look up.

Sun, 06/24/2012 - 20:24 | Link to Comment Bear
Bear's picture

The problem is ... The Russians and Chinese had some vague hope that truth was out there somewhere ... We have none

Sun, 06/24/2012 - 21:19 | Link to Comment Dr. Sandi
Dr. Sandi's picture

Yeah, but we have reruns of the X-Files and they don't.

The truth is too far "out there" for most people to deal with anyway.

Sun, 06/24/2012 - 20:07 | Link to Comment apberusdisvet
apberusdisvet's picture

Certainly not good for the Aussies; could have a small negative effect on the Canadians.  But if truth be known, GM was counting on its survival from China sales.  Let the countdown to the 2nd taxpayer bailout begin.

Sun, 06/24/2012 - 20:17 | Link to Comment kedi
kedi's picture

Canada is in for a rough ride. We are almost entirely an exporter of raw resources. As economies shrink back to reality, we will not be selling and we won't be creating. We will be buying. With what? Sure we have some oil and gas, but that will be less needed as well. We sell the raw ingredients for industry, and have no industry of our own. When other's industry wanes, we are screwed both ways. We do have food though. Probably wholly foreign owned as most things of any value are in this country.

Mon, 06/25/2012 - 02:13 | Link to Comment The Age of Usef...
The Age of Useful Idiots's picture

You should have seen the writing on the wall when your central bank was surrendered to the cartel.

Mon, 06/25/2012 - 04:50 | Link to Comment jeff montanye
jeff montanye's picture

the central bank surrenders to the cartel like the hammer to the smith.

Sun, 06/24/2012 - 22:02 | Link to Comment FFox
FFox's picture

Ahhh... look at those stupid Chinese leaders!  Bringing a rising standard of living to their masses, buying up natural resources, making friends around the world... while our military industrial complex feeds off the carcus of our treasury... along with with Bankster criminal capitalists.

But wait.... the China crash (main stream media hyped) illusion!  I suppose China building out 2000 McDonalds and hiring 70,000 workers to serve their growing middle class doesn't count.

If only US leadership (leading us into more and more war) could manage to get our sinking economy anywhere close to China's growth.... the middle class here might statge a bit of a comeback.... but don't hold your breath... as the banksters want the sheep to shear each other... and their wish is to keep the Jamie Diamons ever more wealthy.... in a toasted democracy owned by digital bankster money and criminal capital picking the winners.

What democracy do we have left.... = None really!

 

 

Mon, 06/25/2012 - 23:42 | Link to Comment monad
Mon, 06/25/2012 - 07:16 | Link to Comment i-dog
i-dog's picture

"I suppose China building out 2,000 McDonalds and hiring 70,000 workers to serve their growing middle class doesn't count."

Not only building McDonalds, but also building mass transit railway infrastructure to get people to work. Some of us are still doing very nicely with China, thank you.

Once somebody puts a fork into the debt balloon (Is there just one brave electorate? ... anywhere? ... Greeks? ... Americans? ... hellooooo?), the world will get back to producing and trading.

Sun, 06/24/2012 - 20:50 | Link to Comment fonzannoon
fonzannoon's picture

If countries like the US are almost entirely an importer of....everything, why would a country like Canada not just ask for higher prices to expert their raw resources even if demand is waning? It's not like the import countries have any say (excluding the military).

Sun, 06/24/2012 - 20:22 | Link to Comment FinalCollapse
FinalCollapse's picture

Oil is dangerously crashing below the critical level of $80/bbl. Starting countdown to oil sands blow ups: 3,2,1...Once oil sands go bust good luck to all nice folks in Canada...

Sun, 06/24/2012 - 20:06 | Link to Comment BigJim
BigJim's picture

It's around now that AnAnonymous starts ranting about US citizenism...

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