Bad Data
Both the recent China HSBC PMI (48.2 in June, down from 49.2 in May) – the details can be seen here (pdf), as well as the most recent trade data were plain bad. There is no sugarcoating this – the long range effects of many years of credit-bubble induced malinvestment are finally being felt, as China's leadership has apparently decided to abandon or curb credit expansion somewhat before it creates a catastrophic crack-up boom.
If the Politburo sticks with this decision, it may actually help laying the foundation for a sustainable upswing. But it is not certain whether it can be trusted to tough it out – especially as the bust threatens to eventually become quite a doozy.
China's manufacturing PMI has slipped back to the lows seen last in 2012 - click to enlarge.
The worsening trade data somehow – don't ask us how – managed to 'surprise' economists once again:
“China Premier Li Keqiang repeated his commitment to steer clear of stimulus for the world's second-largest economy, even as contracting exports added to fears of a slowdown.
China's key export sector shrank 3.1% in June compared with a year earlier, down from 1% year-on-year growth in May and the first contraction in a non-holiday month since the height of the financial crisis in November 2009. Imports fell 0.7% year-on-year, pointing to weak demand at home as well as abroad.
Coming after a raft of disappointing data in April and May, June's weak trade results add to fears that economic growth in the second quarter has continued to slow. The median forecast of 18 economists surveyed by The Wall Street Journal tips gross domestic product growth of 7.5% year-on-year in the second quarter, down from 7.7% in the first.”
(emphasis added)
The WSJ provided the following illustration, which shows that China's labor market apparently remains tight in spite of the recent slowdown, a fact that may embolden the leadership to hold off from providing “stimulus”.
Chinese data overview: exports, GDP growth and labor market supply and demand (via the WSJ) - click to enlarge.
To top off two weeks of dismal data releases, it also was revealed that about one third of China's shipyards is likely to go bankrupt in coming years:
“China, the world’s biggest shipbuilding nation, may see a third of its yards shut down in about five years as they struggle to win orders amid a global vessel glut, an industry group said. The yards in peril of closure have failed to get any orders “for a very long period of time,” Wang Jinlian, secretary general of the China Association of National Shipbuilding Industry, said in an interview yesterday. They may end operations in three to five years if the “gloomy market persists.” The nation has more than 1,600 shipyards.
China Rongsheng Heavy Industries Group Holdings Ltd. Fell the most in almost a year in Hong Kong trading today after saying it’s seeking financial support from the government and its largest shareholder amid a plunge in orders and prices. The stock of China’s biggest yard outside state control was halted yesterday after the Wall Street Journal reported it recently cut about 8,000 jobs.
“Because of the overall market, there’s no way out for the companies; so only the strongest will survive,” Sarah Wang, a Shanghai-based analyst at Masterlink Securities Corp., said. “Life for China’s shipyards will be tougher this year as any form of credit crunch is critical.”
(emphasis added)
This is not a big surprise, and it is actually good news, since obviously the 2002-2008 bubble has left the world with massive overcapacity in the ship building industry. The shipping industry has provided us with a textbook example of massive malinvestment in higher order goods industries as a consequence of an artificial credit boom. Interestingly, China's stock market took all these news in stride and finally decided to rebound a bit:
The Shanghai A share stock index rebounds after a harrowing decline to new lows for the move in June – click to enlarge – click to enlarge.
Fake Data
Here is why the only surprise about the deterioration in China's trade data was that it managed to surprise anyone. The government had previously declared a war on fake data, specifically fake export data, which previously masked the weakening of exports.
"China’s crackdown on fake export invoices used to disguise money flows is probably cutting the nation’s trade figures, revealing subdued global demand that will weigh on economic growth.
Outbound shipments may have grown 7.1 percent in May from a year earlier, less than half the previous month’s reported 14.7 percent, based on the median estimate of 34 economists ahead of data due June 8. Import growth probably slowed to 6.9 percent from April’s 16.8 percent, a Bloomberg News survey showed.
Successful deterrence of fraudulent data through regulatory scrutiny of companies and banks would help restore trust in trade figures, while more accurate numbers may also highlight the urgency for Premier Li Keqiang to shift growth toward domestic consumption. Weakness in exports could also test Li’s reluctance to add stimulus to support the expansion of the world’s second-biggest economy.
“The crackdown from China’s foreign-exchange authorities on fake invoicing will bring the inflated export growth down to the real trend, which is single digits,” said Zhang Zhiwei, chief China economist at Nomura Holdings Inc. in Hong Kong, who projects export gains of 5 percent for May. More broadly, China’s economy “is weakening but is not collapsing,” said Zhang, who previously worked at the International Monetary Fund.”
(emphasis added)
We would point out that more accurate (or less fraudulent) data cannot possibly 'weigh on economic growth'. However, the fix may indeed help with 'restoring trust'. Why the chief central planner is supposed to shift economic activity in China 'toward more consumption' is not quite clear to us, although everybody seems to be saying it. It is true that there has been a lot of capital malinvestment in China, but it doesn't follow from this that China could improve its economic well-being by consuming more. One cannot get richer from consumption. The best thing the central planners could do would be to stop planning and interfering altogether and leave the economy to its own devices.
It is a relief to hear that the economy is not 'collapsing', but who knows, this may well be a case of 'not yet'. The improvement in trade data collection evidently does not mean that any other economic data published by China have become more reliable or trustworthy. This brings us to our next point.
No Data At All
Let us begin by noting that ideally, governments should not collect any economic statistics at all. There is only one reason for which such data are collected: they provide the justification for government meddling in the economy. Obviously, if it had no data available, the government would no longer know where to meddle. We all would be better off as a result.
However, there is a second, subsidiary reason for the data collection effort, or more precisely, the post collection data massaging effort: it provides the government with propaganda material, as good data are always claimed to be the result of government intervention, while bad data are routinely ascribed to 'no could have seen it coming' natural catastrophe type of events, akin to bad weather. Usually bad economic data are held to be a sign of 'market failure', requiring even more government intervention. This despicable nonsense has been cooked up by Keynes way back when and continues to inform economic policy the world over to this day.
China is well known for providing the world at large with data that are widely considered especially dubious. Its latest decision is to no longer provide certain data at all, which suggests that they are about to worsen considerably.
“China suspended the release of industry-specific data from a monthly survey of manufacturing purchasing managers, with an official saying there’s limited time to analyze the large volume of responses.
“We now have 3,000 samples in the survey, and from a technical point of view, time is very limited — there are many industries, you know,” Cai Jin, vice president of the China Federation of Logistics & Purchasing, which compiles the data with the National Bureau of Statistics, told reporters yesterday in Beijing.
The disappearance of data on industries including steel adds to issues hampering analysis of the world’s second-biggest economy, after fake invoices inflated trade numbers this year. Neither the federation’s nor the statistics bureau’s statement on the manufacturing Purchasing Managers’ Index this week gave readings on export orders, imports and finished-goods inventories or an explanation for the omissions.
“Suspension of the monthly data, without prior notice, makes the research work difficult for us,” Xu Xiangchun, a steel researcher and chief analyst at Mysteel.com, said by phone from Beijing. “The random absence of official data is disorienting.”
(emphasis added)
In this particular case we have to side with the disoriented analysts. PMI data are among the few economic data points that are really informative, since they provide an overview of industry views. 3,000 samples in the survey pose a problem? This is ridiculous. Maybe someone should donate a PC to the poor Federation of Logistics and Purchasing and the National Bureau of Statistics.
No industry specific data anymore? No data on export orders, imports and finished goods inventories? That indeed leaves analysts groping in the dark. To the extent that the failure to collect such data may provide an obstacle to government meddling it could be a salutary event, but we fear that the main reason for this new policy is mainly to allow the government to hide some of the long range effects of its past policies and discourage outside scrutiny.
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