Myth-Busting China's Numbers
Matthew Crabbe, author of Myth-Busting China's Numbers, uses statistics to look at China's recent stock market plunge.
Why investors should untwist their knickers over China’s stock market performance
China’s transformation from demon exporter to domestic consumer saviour of the global economy was never going to be an easy one. That it had to make the switch was both inevitable, and was what both China and the outside world (including investors) desired. But, as I stated in the conclusion of my own book Myth-Busting China’s Numbers, this shift was no easy task to pull off, and would indeed, if the Chinese government was successful, would be even more a significant feat than even the past 30 years of economic and social metamorphosis.
As I also went at length to point out in my book, there were plenty of reasons why the economic data coming out of China is flawed, why the health of the corporate world is difficult to fathom due to opaque data, and why the stock market in China has significant structural issues. My book was published in April 2014, well ahead of the August 2015 currency and stock market devaluation that sparked panic selling all over the world, wiping off billions of dollars of on-paper corporate value.
So, here it comes: “I told you so!” And it’s not even as if I was writing anything not already well publicised.
Let’s start with the perennially problematic GDP figures. Chinese premier Li Keqiang has been famously, and routinely, quoted as stating prior to taking over the government that China’s GDP figures are “man-made”. From accusations of using the wrong deflationary index to over-calculating industrial gains to miscalculating the consumer market, many deficiencies have been levelled at China’s GDP figures. But, as I argue in my book, GDP was never a very good indicator of real economic activity, especially in such a huge, fast-growing and relatively structurally rudimentary economy as China’s was. Better for economists and investors to focus on individual sectors, and proxy indicators of growth.
As for China’s stock markets, the regulators have been pushing out many of the non-performing, rust bucket shares, and allowing in (gradually) a raft of new, more consumer-focused and privately-owned companies – which better perform most of the state-owned companies, whose assets are managed by industry experience light apparatchiks. China’s central bank had been mooting the idea of investing pension pot in the stock markets for some time – one of the recent remedial moves posited to reboot the equities market. Madness? Well, when better to invest than at the bottom of the market, and considering the poor returns being earned sitting in local government current accounts, and the dire need to grow the pension pot, this might actually work!
Sure, China’s economy is slowing. That was both inevitable, and desirable. Inevitable because no economy can play catch-up forever. Sooner or later, it will catch up. Desirable because China needed to move from churning out massive quantities of cheap stuff to fuel foreign consumer lust for cheap goods, made by people on low wages working in factories churning out massive levels of pollution. The shift towards domestic consumption has brought greater demand locally for better products, providing more value and quality, and producing less of the detrimental effects on China’s beleaguered environment so local people could hope to enjoy their new-found wealth without choking to death.
There is also the question of mounting debt to contend with, especially at the sub-central government level. Here too foreign commentators mistake what is going on in China as representing the same ills that befell the governments and financial markets in the West, and elsewhere. China has enough money, it just needs to restructure its debts and refinance its local governments through prudent fiscal reform. Sounds simple, and, of course, it is not, but the country is already making the right moves to achieve this. Corporate debt is a worry, and the longer the country delays a root-and-branch reform of the state-owned corporate sectors, the more worrying that issue becomes. But, again, it is the private sector that is flourishing, and the state sector that needs reform. There is plenty of value being created to demolish those debts, and the banks are already being forced into funding loans more to the private sector than the state sector, which will only help to redress the lop-sided load of money supply away from the least efficient sector of the corporate world in China, and towards the more efficient private sector.
All of these mechanical realities are laid out in my book, not because I am some prophet blessed with the foresight of genius, but simply because I have been able to gather the evidence from a vast pool of ready-made, publicly available information.
So why does there continue to be the kind of knee-jerk panic reaction to any slightly wonky Chinese data? That is hard for me to explain simply, but it comes down to, in my own view, investors misconstruing what is going on in China’s data. For a start, the 7% growth in GDP (if that is what really happened) is still bigger, in absolute value-added to the world economy, than the 13% growth 10 years prior. Even if you believe that growth last year was only 5.5%, as some have suggested, that is still more than 10 years ago, in value added, because the base number is three times larger than it was 10 years ago.
China’s consumer market is ever more efficient, thanks in large part to the growth of online retail. That online retail market is outstripping any other in the world, as it innovatively leap-frogs the stages undergone elsewhere. Not only is that bringing more, better quality goods to people in China from within China, but also directly from around the world. China’s consumer market growth is increasingly interwoven into the economy of the world, in ways unseen elsewhere or before.
Sure, there are problems with China’s data, its economic structure and its industries, but they are being addressed. They can only be solved gradually. That means there will be painful adjustments. But the overall picture, from where I stand, continues to be that of continued growth potential.
Beware those panicky bears!
Matthew Crabbe studied Chinese language, society and history at the University of Leeds and has since turned an academic interest in China into a career. As co-founder of research company Access Asia, Matthew has worked exhaustively on trying to make sense of the myriad contradictions in statistics on the consumer markets in China. He has conducted detailed analysis on China's retail sales for many years, working to highlight how China's official retail figures do not reflect the real size of the country's domestic consumer economy. He is the co-author of two books and has written hundreds of reports on China's consumer markets over two decades.