Mapping The Real Chinese Economy From The Bottom-Up

Tyler Durden's picture

Our earlier discussion of the rapid slowdown in Asia trade volumes and the anecdotal evidence of growthiness issues across many industries brings up the seemingly dichotomous relationship between top-down 'data' such as GDP or PMI and bottom-up sector-level activity. As BofAML points out, there has been a significant improvement in data collection in this activity data which enables 'outsiders' to cross-check macro data and potentially obtain leading information. As markets have become skeptical of China's macro data, so the effort to search for alternative measures such as power output, container throughput, and rail transport seems worthwhile. Though not perfect by any means, the higher frequency data mapping flowchart below and a comprehension of the upstream vs downstream activity flows seems to go a long way towards building a credible view on the real state of the Chinese economy - for better or for worse.



BofAML: A guide to China’s activity data

Every day, I still look for the price of No. 1 heavy melt steel scrap.

-- Alan Greenspan, The American Iron and Steel Institute's annual meeting, 1997

In the financial sector, economists attempt to spot and forecast turning points of business cycles as well as to predict government policies. Economists used to almost exclusively rely on macro-level data such as GDP, Industrial Production (IP) and Fixed Asset Investment (FAI). This is especially true in emerging markets like China where sector-level activity data are not easily available. However, with significant improvement in data collection and rapid economic growth, a large number of sector-level data are available for us to both cross-check macro data and obtain leading information on China’s economic activities.

In this report, we wish to introduce some of these activity data with a practical and balanced approach. Markets have been increasingly skeptical of China’s macro data when the Chinese economy is in a downturn, so we think it might be worth the effort to search for some alternative measures such as power output. However, activity data are no panacea. Actually, they could have as many problems as those macro data and in some cases their quality could be even worse while analysis of those data could be much trickier, so we should always avoid accepting these data without prior examination. We believe activity data, if carefully analyzed, could be a good complement for macro data, but they could never be a replacement.

Advantages of activity data

First, activity data could be subject to less distortion. For some activity data, collections and compilations are easy and transparent, and therefore they may be considered more reliable; for some other activity data collectors may not have any reason for distorting the data. Some activity data have higher frequencies than those commonly used monthly macro indicators, giving them a special advantage in predicting macro trends. Third, sector-level activity data could provide rich information on how different parts of the economy perform at different stages of business cycles. This information might be particularly useful for stock pickers.

Disadvantage and traps of activity data

Though macro data could be occasionally misleading, sector-level activity data are definitely not crystal balls. First, individual sectors may have their unique cycles and may not be representative of the whole economy. For example, pork supply fluctuates due mainly to bounded rationality of Chinese farmers and diseases, which has little to do with the general consumption demand. Second, most activity data are just coincident or lagging indicators instead of leading indicators, although sometimes higher frequencies of those data give people the impression that they act as leading indicators. Third, activity data are not free from potentially being distorted. .Fourth, high frequency (daily, weekly) activity data are technically difficult to analyze as they are subject to seasonality that is hard to adjust in China which has its own calendar compared to western countries.

Upstream vs. downstream

We also group those selected in two categories: downstream and upstream. Usually change of downstream activities such as exports, infrastructure/property FAI and auto sales could be quickly passed on to upstream sectors such as power, coals, steel, cement, non-ferrous metals and construction machinery. In those upstream raw material sectors, prices (if not regulated) and inventories could be quite sensitive to downstream demand. The transportation and telecommunication sectors connect those upstream and downstream sectors, so we will also cover them briefly. In Chart 1 above, we outline the activity data covered here and their relationship with macro data.

Price vs. volume

In the compedium of charts below we compare the correlation of these data with more aggregate economic data, especially IP, which we believe is probably the best monthly indicator for GDP growth in China. In raw material upstream sectors such as steel, cement and nonferrous metals, price is more important. In sectors such as transportation, construction machinery, auto and property, sales volumes are more important. Electricity is an exception as power tariff is regulated while inventory is technically impossible, so we will just monitor power production and consumption.

Click chart for larger more viewable graphs


and where do all these data come from...


Source: BofAML

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reader2010's picture

Visited Shanghai and Beijing among other lesser known cities a month ago. What really surprised me is the number of brothels, even in many opulent five-star hotels. 

FreedomGuy's picture

All part of good customer service, I am sure. The ventures into free trade have many branches.

The Monkey's picture

It doesn't take a rocket scientist to figure out that China's rapid growth story is due to end, and that it will eventually hard land. What you need to ask yourself: is this really the time and price?

The Shanghi exchange is at 52 week lows with the dollar index near 52 week highs. Central banks are readying the next rounds of stimulus. There is no tightening of any kind on the horizon.

otto skorzeny's picture

the best 535 whores in the world you can buy are in The US Capitol building

malikai's picture

Ugly as sin, but they get the job done!

vinu02's picture

I wish all the manufacturing jobs comes back to US, too tired watching Chinese goods everywhere.

FreedomGuy's picture

The problem with evaluating any communist country is the history of decades of lieing, formal lieing, mind you. Every five year plan hits or exceeds it's goals, the people are happier than ever and the future is bright, blah, blah. Lieing is a part of survival in all communist and totalitarian regimes. Wrong answers and truth have high morbidity and mortatliy rates. It is a big part of why all statist regimes fail over time and why their technological progress and productivity stop completely.

What China will learn is that in any free or freer economy analyists look for alternate markers and signs of current and future economic activity. It gets nearly impossible to hide all aspects and "tells" in the economy. So, you can say GDP grew at some phenomenal rate and construction is booming but analysts will look to concrete and copper sales among other things as this report does. Not a bad thing to do with any government stats from any country, to be honest. 


mjk0259's picture

Yes but the copper and concrete sales numbers are probably lies as well or otherwise misleading. For example, companies stockpile copper in warehouses to use as collateral for loans. Anyway, they seem to be doing a much better job than the US at increasing prosperity. US government doesn't seem to be measuring anything accurately that helps in improve or even maintain middle class

FreedomGuy's picture

They may be lies. My point was not just those two commodities but that it is more difficult to lie without being caught in a free economy. If the liar is sophisticated they are harder to catch but there is a true economy below the official government economy...probably in all nations. China will probably improve their sophistication in lieing as they learn what is tracked.


johny2's picture


it is understandable what you meant, but I just wanted to be helpful. 

Haager's picture

Are we really in the position to blame others about lying, fixing numbers or whatever else we could name fraudulent behaviour?

Moreover: I really question the ideals of Friedman, not the ideas as a market theory. I foresee that any nations government will end up totalitarian that tries to embrace the ideas fully without changing the elitist thought of that theory.

slewie the pi-rat's picture

on those charts, fuk_u [march, 2011] does not appear to have done china much good

chump666's picture

China is going to blow.


silverdragon's picture

Good luck at trying to analyze China data.

All the date is nonesense for so many different reasons.

I know it isn't popular to point out that the China economy is still growing at a nice rate, even with Beijing with its foot on the brakes of the economy, but its reality.

Growth rates for so many industries in China are still ridiculous.

Doubling growth each year is doable, growth of 10-20% would be cause for serious introspection.


asteroids's picture

Pity the same methodology isn't used for G7 countries which are obviously just as bad as China in fudging their numbers.

Suraj Corominas's picture

Rumor has it, if you apply the same kind of analysis to Japan it shows there never was a recession, a 'lost decade', or even much of a slowdown. Maybe there's a trade advantage in fudging the figures in the other direction? 

JohnF's picture

Seasonal adjustment doesn't care about calendars and the like: the X11 Census seasonal adjustment process can handle any sort of calendar. Seasonal adjustment is a problem when the data is volatile and doesn't follow much of a seasonal pattern. Given the fact that China has multiple regions that have differing business cycles, aggregating Chinese data is the problem, since a downswing in one region may be cancelled by an upswing in another region. You gotta look at the disaggregated data, not the data for China as a whole.