Is China really that promising?
As noted earlier, Temasek Holdings has been upping its investments in China, seeing a more promising land of investments compared to the West, where it got burned badly when it invested in banks at the heart of the financial meltdown like Merrill Lynch. Clearly, the economic news this days show China on a roll, and it seems very unlikely that China would enter a recession anytime soon. But how reliable are the accounting standards in China?
With investors pouring money into emerging-market funds on hopes that China’s recovery will support Asian economies in general, the debate about a disconnect between various indicators of growth has taken on a special resonance.
The focus these days is on the mismatch between China’s electricity consumption and a key measure of industrial output.
For most of the past decade, China’s industrial value-added growth (IVA) –industry output less input costs – has moved broadly in step with movements in electricity consumption. But the relationship’s broken down recently: electricity use is still seeing negative growth, while IVA is growing at a decent positive rate again.
Some China analysts are crying foul: If IVA growth figures are being cooked, surely that means China’s recent GDP data have been overstated too. China’s statisticians use IVA output to estimate what accounts for nearly half of China’s GDP.
China’s association of electricity generators has a solution: it’s stopped publishing consumption data. This bid to soothe market speculation has only added to naysayer doubts.
That’s right. You read that correctly. We’re talking about a country which has been in the news in the past few months for tainted baby milk, milk sugar sweets and is often rife with rampant corruption. If that is so, then one shouldn’t expect it to consistently churn out reliable economic data on their industrial output:
Laying aside the obsession with electricity consumption still leaves a further problem. As Standard Chartered research points out, the IVA measure –overstated or not – itself has recently fallen faster than overall GDP. Usually the relationship is the other way round: So this is another clue suggesting the headline data are rather too punchy.
Ignorance is bliss when it comes to sausage-eating, but investors want to be wary of trusting in China’s economic rebound until clearer patterns start to emerge.
Singaporeans must be praying that Temasek’s recent foray into China pays off for them. Given the above development it may not be too surprising if the government passes yet more restrictions on withdrawing their own CPF money if the worst case scenario materialises.
Update: Today’s WSJ reports on the rising number of bond defaults by Chinese firms issuing foreign debt.