China revelation from WikiLeaks too sensitive for banks

Investment bank economists turn tail and run when asked by AsianInvestor to comment on how Li Keqiang analyses the Chinese economy.
China revelation from WikiLeaks too sensitive for banks

Last week, the WikiLeaks disclosure of US diplomatic cables included an admission by the current vice-premier of China, Li Keqiang, that Chinese GDP figures are “man-made”.

Li made the comments three years ago to the American ambassador when he was head of the Communist Party of Liaoning province. Today as vice-premier he is tipped to succeed Wen Jiabao in 2012 as the nation’s premier.

He told then-ambassador Clark Randt that he focuses on three data points to gauge growth: electricity consumption, rail cargo volume and bank lending.

Chinese GDP figures have already been notoriously suspect for many outside analysts. This is the first time a member of the State Council admitted as such. However, it is also a revealing peek at how Beijing’s mandarins really do study the economy.

This leads to some interesting questions. If a heavy-hitter such as Li analyses the economy this way, is it also the best way for economists and investors to do so?

Do these criteria fit the national economy or would they only suit a heavily industrialised north-eastern province such as Liaoning?

If we do just consider Li’s three data sets, how have they changed over the past three years and how would the result compare to what you’d get by just looking at GDP and other woolly indicators?

In other words, what does Li’s revelation really tell us about the state of the Chinese domestic economy?

I asked a number of investment banks, independent economists and investors for their view. Admittedly these are big questions that require time for a considered response, and I didn’t leave much of a deadline. But here’s how the results basically break down.

Investment banks: “Thanks,” replies one spokesperson, “but unfortunately, it’s a sensitive issue to comment on, and I’m afraid we will have to skip this.”

It could have come from CLSA, Deutsche Bank, JP Morgan, Goldman Sachs, Morgan Stanley or UBS. They all pretty much said the same thing.

Independent economists: Quick feedback suggests, firstly, that three data points of any type are not a sufficient analysis for China’s or any other economy. So perhaps vice-premier Li has an overly simplistic measuring stick.

However, his data points seem to be good ones. “His data points are real-economy indicators and relatively reliable,” says the investor Marc Faber.

One independent economist says lending data and electricity consumption are certainly important indicators.

“The lending data is telling you that China engineered a massive monetary expansion and its economy is addicted to credit for growth,” says this independent. “But it’s overheating now, so Beijing has to tighten policy. The electricity consumption is telling you that the economy slowed down quite a bit in Q3, and the main drive behind that has been the rush to achieve the energy-efficiency targets by the end of this year.

“So the authorities shot themselves in the foot as this has engineered cost-push inflationary pressures on top of demand-pull inflation, which will rage as long as the authorities resist pushing up deposit rates.”

A second independent economist agrees that Li’s data points are sensible, but imperfect. “There are problems with the [electricity consumption] as shifts between heavy and light industrial use tend to cause major distortions, and in China, electricity usage is disproportionally corporate. As for [bank lending], the banks have found new ways to create shadow lending in recent times, and I sense that this is going to be stamped on hard.

“My own view is that we are thoroughly overheated, which [rail cargo and bank lending] support, and it has been said that Li has been the person lobbying hardest since late 2009 to slow things down… In the end, it comes down to the centre agreeing on a policy first, and then having the balls to exercise control over the provinces in the face of local objections.

“Given that Chinese New Year is early February next year, we should have a pretty decent read from what happens to credit supply in January, given that Chinese banks traditionally seek to lend a high amount of their annual quota pre-CNY. If January is still loose, I think we are on our way to double-digit inflation and a far more panicked response later in the year.”

AsianInvestor appreciates the quick comments from the independents and suggests the investment bank economists have new analysis to work on over the holidays.

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