This is why HSBC’s Flash China PMI data, due to be released on Tuesday, will be watched more eagerly than usual by investors.
Doubts about the reliability of statistics out of China are nothing new, but in the current climate they add to the damage to confidence already done by scandals in developed countries, such as the one involving the fixing of the London Interbank Offered Rate (Libor) by major banks.
“The markets are looking for some signs the economy has recovered. If tomorrow’s data is bad, it would damage hope that China’s economy has started to recover,” Qinwei Wang, China economist at Capital Economics, told Emerging Markets.
The HSBC Flash China PMI survey is based on between 85 percent and 90 percent of the total PMI survey responses and it aims to provide an early indication of the final PMI data, which is released a week later.
June’s data showed further contraction, with the index hitting a 7-month low at 48.1 versus May’s 48.4.
Official figures out of China earlier this month showed the economy grew at just 7.6 percent in the second quarter, the slowest pace in three years.
CHINA GDP THE NEW LIBOR?
But some market watchers doubt even this depressed figure, with Lawrence McDonald, an economist and author of the book “A Colossal Failure in Common Sense – The Inside Story of the Collapse of Lehman Brothers” wondering on his blog about how genuine China’s reported GDP figure is.
“In 2008 they didn’t want us to know how bad Libor should have been. Today I think the numbers that are coming out of China don’t match the GDP. If you look at energy usage, it’s flat year over year. Earnings levels in China of all the publicly-traded companies are back at 2009 levels. 2009 GDP in China was 6 percent, not 8 percent. So it just doesn’t add up,” McDonald said in a CNBC interview.
Capital Economics has devised an alternative way to track the pace of growth in China “without relying on the official GDP figures” via its China Activity Proxy (CAP) indicator, which is based on five components: total freight, electricity production, seaport cargo, floor area under construction and passenger traffic numbers.
The CAP has tracked official GDP data closely in the last few years, Wang said, but in the first and second quarters of this year, the readings were about 0.6 percentage points lower than the official GDP measures.
“That said, both the CAP and the official figures suggest that the pace of slowdown in the first half of the year was still much smaller than that in the second half of 2008,” according to Wang.
CHINA BANK LOANS
Carl Weinberg, an economist at High Frequency Economics, argues that China can grow for some time “without incremental electricity output.”
“This cannot go on forever, but a one-quarter disconnect between electricity output and GDP growth is not a big deal. We have seen it before,” Weinberg wrote in his weekly note on China’s economy.
Official statistics measure electricity production, not demand, and the slowdown in the growth of output reflects “a dearth of large-scale hydro projects coming online over the last 12 months,” he added.
An analyst told Emerging Markets last week that the most hopeful story at the moment was the growth in new loans by Chinese banks, which would give a boost to the economy in the second half of the year.
Confirmation of this trend may come in the first half of August, when July data on loans is released by the People’s Bank of China (PBOC).
“I think the more important data will be the lending data. That’s the leading indicator to show whether or not the government’s efforts have passed through the economy,” said Wang.
“June’s lending was very strong. Not only banking loans but also those by non-banking financial institutions. This suggests the government’s effort has been passed on through the economy very well,” he added.