Ichiro Suzuki China’s economic statistics can’t be taken at face value. This has been well understood among economists and investors for years. The country always tries to make them look better than they really are, reporting more or less inflated numbers. It’s been said that electricity consumption numbers better represent the state of the Chinese economy than GDP. Electricity numbers are more difficult to fudge than growth rates and hence closer to the truth, it is believed. This tendency to make themselves look better is attributed to a combination of a variety of factors: aspiration, inferiority complex, vanity, national pride, a big ego, etc. The Middle Kingdom has to be better than it is today, Communist Party leaders think. Otherwise they would find it difficult to impose their will on other countries, especially those in the developing world. The tendency appears to have intensified the last ten years, since Xi Jinping rose to presidency succeeding Hu Jintao. President Xi is a great deal more nationalistic than his predecessors in the last few decades, without much tolerance for revealing China’s negative side to the world. Announcements of key economic numbers are delayed if they are believed to offend President Xi’s disposition and these numbers could be trusted even less than those in the past. It is anyone’s guess how much deviation there is between the official size of the Chinese economy at $17.7 trillion and whatever the reality is, assuming reported growth numbers have been inflated for years. The same is true for other statistics, such as the ones supplied by international institutions. Birth rates and other demography-related numbers are widely questioned, too. China’s fertility rate at 1.2 is already lower than Japan’s 1.3, according to the United Nations. There is a reasonable chance that it is lower than 1.2., considering unique factors that exert pressure on demography in China: a greater number of men than women in the market, with the former bound by an ‘obligation’ to buy a house before marriage. On top of it, educated women are enjoying their career, with zero interest in ‘marrying below’ to men who went to a lesser school and are earning less. Of course, it is exceptionally hard to make a best guess out of officially supplied opaque data. More seriously, official non-performing loans numbers are definitely lower than what they really are today and will be in the future. (This one is lower as opposed to the vast majority of others that are higher.) NPLs are monsters that keep growing as the economy underperforms expectations. Sub-par growth keeps creating new loans that are not paid back in time as borrowers struggle amid a challenging economic environment. The longer the economy struggles, the greater the size of NPLs become. No government is dare to predict shockingly large NPLs until they are forced to, and China is no exception. China’s intense desire to make things look better have serious consequences. In the case of NPLs, the government is always behind the game in fighting growing NPLs and becomes an obstacle to restoring the economy’s health. On economic growth, fudged data lead to capacity of the economy that tend to be too large for its activity. Excessively large capacity has always been a problem in the Chinese economy since the last decade when its growth rates began marked deceleration. This leads to high operating leverage that hurts profitability in the economy. Excessive capacity also tends to exert downward pressure on prices since the market is flooded with sellers who want to dump their products at any price. A weak profit environment is a recipe for greater NPLs that in turn stun policy makers. A desire to fudge statistics gives rise to wider supply-demand gaps, thus hurting the economy. One solution President Xi brought to narrow the gap was Belt and Road Initiative (BRI). From one perspective BRI is considered as a policy of exporting excess inventory of materials and construction workers, and it has not been known as boosting local employment in the aid-recipient countries, In President Xi’s China, there is nonetheless one thing that keeps telling the truth, defying the autocratic ruler. It is the stock market. Economic statistics can be fudged. Foreign exchange and bond markets can be manipulated, to a certain extent. (The Bank of Japan is a master manipulator of the bond market.) The stock market, however, can’t be bent to the will of the ruler, telling the emperor that he has no cloth. President Xi must be wishing that his country didn’t have a market that has no hesitation to deliver bad as well as good news. He simply ignores the market, it seems.
About the author: Mr. Suzuki is a retired banking executive based in Tokyo, Japan.