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China's Deficient Deflator Math Is One More Reason To Distrust Data
It’s no secret that Beijing’s ‘official’ GDP prints likely overstate the pace at which China’s economy is growing. In fact, the numbers may be grossly exaggerated, as some analysts say the real rate of expansion is somewhere on the order of 4% (as opposed to 7%).
We’ve noted on any number of occasions that multiple key indicators — such as rail freight volume, industrial production, electricity consumption, etc. — suggest the dreaded “hard landing” is in fact here, and if Beijing fails to figure out how to balance a sharp decrease in shadow financing with the need to boost credit creation (i.e., if China can’t navigate the impossible task of deleveraging and re-leveraging simultaneously), things could get materially worse before they get better for an economy that’s attempting to mark a very difficult transition from investment-led growth to a consumption-driven model. For more on transparency and why the real rate of growth in China’s economy is “anybody’s guess”, see “Guessing Game: China's 'Real' GDP Growth Could Be As Low As 3.8%.”
Beyond intentional misrepresentations however, China’s GDP data may suffer from a calculation error that at least one firm claims is endemic across emerging markets thanks to data collection limitations.
FT has more:
The issue centres on the so-called “GDP deflator”, the inflation measure used to convert estimates of nominal GDP into real, inflation-adjusted terms.
The deflator is a broader measure than indicators such as consumer or producer price inflation and is therefore often considered a more useful gauge of overall price pressures in an economy. It is the preferred inflation measure of the US Federal Reserve.
Since GDP is a measure of domestic output, arguably this deflator should only reflect the prices of domestically produced goods and services.
In practice, this means netting out the price of imports in the calculation of the GDP deflator, a routine practice in countries with “robust statistical systems”, as Chang Liu, China economist at Capital Economics, puts it.
For much of the time, a failure to do this might not matter too much. However, at times when import price inflation varies markedly from domestic inflation, such as when global commodity prices are rising or falling rapidly, it matters more..
Because China does not net off shifts in import prices when calculating the deflator for most sectors of its economy, its deflator tracks producer price inflation much more closely.
As a result, Mr Liu says: “China’s GDP deflator is not an accurate measure of changes in domestic output prices. It exaggerates inflation when import prices are rising, and understates it when import prices fall”.
In the first quarter of the year, China’s deflator turned negative for the second time since 2000, coming in at -1.1 per cent. In comparison, consumer price inflation was +1.2 per cent. This means its inflation gap has jumped to 2.3 percentage points, even as it has fallen sharply in the likes of the US, as the chart shows.
If the deflator is, as a result, understated, then real GDP growth is overstated by the same amount.
“A reasonable guess might be that true inflation was 1-2 percentage points higher than the deflator shows. In that case, real GDP growth in Q1 would have been 5-6 per cent [rather than 7 per cent],” said Mr Liu, who added that the lower rate was closer to Capital Economics’ own estimate, based on activity data, of 4.9 per cent.
In other words, when commodity prices are falling, China (and other EMs) may be routinely overstating GDP growth. As a reminder, here are some estimates for 'actual' (i.e. not emanating from Beijing) Chinese economic output:
While Capital Economics is careful to suggest that this statistical 'error' is baked into estimates like the ones shown above, one is certainly left to wonder whether the understated deflator should be simply one more factor to consider on the way to estimating what the real growth rate in China actually looks like.
In other words, considering the above, it could well be that GDP growth in China is closer to flatlining than anyone cares to admit.
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NE provinces liaoning jilin heilongjiang are not very good bellweathers for the economy anymore and haven't been for about 5 years... i mean, the latter never really was but the former two, if they ever were before, aren't now. and their housing investment has always been slower and more stable.
http://1.bp.blogspot.com/-hXz-Wt_oa6Y/VTWwBAQ7B9I/AAAAAAAAGSw/yg_3MqYHgi...
it could enter a recession but q4 was relatively still strong in terms of real estate investment (stable all year) and the weak Q1 already has shown a rebound by at least half, so if it does fall into a recession, it'll be skirting it pretty close
and truthfully, if liaoning entered that much of a recession, it would just be a buying opportunity. dalian is one of the top retirement and 'raise your kids' cities in china (notably for those getting sent abroad at least). basically half of every super rich chinese 20-something in vancouver come from the same high school in Dalian... Maple, or whatever. that #1 second generation rich kid with the 2 gold iWatches for for his dog? also dalian high school. if liaoning entered much a recession, the economy in general would slow down i'm sure and so would investment as there is a lot of real estate but real estate volume would probably surge as it would just signal a buying opportunity to get second homes for vavation or to send kids to high school in dalian.
ancecodotally, everyone i know from dalian does say business sucks and times have been time last 3-4 years but none of them are super worried either because they know how in demand dalian is as a city and eventually any notable dip is just going to offer buying opportunities 4-5 years down the line.
The Chinese learned all of their economic math at Yale and Harvard. Such deception seems to be endemic among the graduates of those institutions.
Otherwise...wait...are we talking about Chinese economic deception or American economic deception?
Chinese, or American economic deception… are they different?
They’re trained at American ivy leagues, with squid fundings, no?
A chi-mera is a two-headed beast, joined at the hips.
Excellent post by ZH.
Capital flight of 1 t per year out of China into mainly real estate in UK, California, Canada, NZ Australia is then very risky. For the next few years this capital flight will send real estate prices in these places through the roof but at some stage it has to stop - when the loan sharks back in China realize it aint comin back and stop lending.
And now the FED is saying it will keep interest rates low indefinitely, meaning that the asset bubble inflators from the US will keep the ponzi going a bit longer.
But guess what. Whether bought by Chinese dirty money or Fed hot money sooner or later an unproductive asset is an unproductie asset. It just may go on longer than we all can imagine. But it will POP. All the world together this time. The Chinese who bought last hurt most. Massive capital wipe out. Housing has a habit of getting rid of cash really efficiently with great granularity.
So name your date. I think now circa 2017.
Excellent point. I'm a bit surprised that the Chinese did not pay more attention to what happened to the Japanese in the late 80s/early 90s regarding their real estate investments in the US.
I guess when you have a billion dollars, you either become stupid or think everyone else is stupid.
2029 ... has an anniversary ring to it, doesn't it?
Let's not forget that the Chapwood Index for 2014 was 9.7% and official CPI in the land of the free was only 0.8%. So the Nominal GDP of 5.6% for 2014 becomes real GDP of -4.1%.
The revised real GDP for years 2011 to 2013 worked out to -6.2%, -6.5%, -6.5% respectively.
What is the Chapwood Index?
"The Chapwood Index reflects the true cost-of-living increase in America. Updated and released twice a year, it reports the unadjusted actual cost and price fluctuation of the top 500 items on which Americans spend their after-tax dollars in the 50 largest cities in the nation."
http://www.zerohedge.com/news/2015-05-29/inaccurate-statistics-and-threa...
The PBoC ballance sheet "dwarfs" the Fed.
China is scared "shitless" over the Treasury Market. If rates rise, china gets hosed.
This whole "shitstorm" is going to be global. China is still a "net" buyer of UST. Bitchez
Uhh?
Arghhh?
18:30 CNY CPI (MoM) (May) -0.2% 0.0% -0.2%
18:30 CNY CPI (YoY) (May) 1.2% 1.3% 1.5%
18:30 CNY PPI (YoY) (May) -4.6% -4.5% -4.6%
If they rsise rates it will benefit china only as fed will pay more interest to cjinese .
The USD will appreciate more and if the Chinese want to keep the peg, which is still official policy then guess what happens with the Yuan? I'm sure that doesn't bode too well for the current Chinese economic environment.
Like deflation resulting in growth elsewhere....